A manager has a utility function U = C ^0.5 if she doesn't work hard and U = C ^0.5 - 3 if she does.Expected profit will increase from 1,000 to 1,500 if she works hard.The manager receives compensation C equal to 144 plus a portion x of any profit in excess of 1,000.What is the value of x that will make the manager indifferent between shirking and working hard? A) 0.09. B) 0.105. C) 0.19. D) 0.162. E) None of the above.

Question

Quizplus · Accepted Answer

The manager's utility from shirking is U = C^0.5 = (144)^0.5 = 12.Her utility from working hard is U = C^0.5 - 3 = (144 + 150x)^0.5 - 3.Setting these two utilities equal, we get:(144 + 150x)^0.5 - 3 = 12(144 + 150x)^0.5 = 15144 + 150x = 225150x = 81x = 0.162

A Manager Has a Utility Function U = C 0

A Manager Has a Utility Function U = C ⁰