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Incentives in the Firm

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Incentives in the Firm

Category: Coursework

Subcategory: Economics

Level: College

Pages: 1

Words: 275

Name
Tutor
Course
Date
Incentive in the Firm
CEO’s proposal
Firm price: 100 – Q
Firm output: Q
Total revenue: 100Q – Q^2
Firm profit: 100Q – 1.5Q^2
CEO compensation: 20%
Remaining profit for owners: 80Q – 1.2Q^2
Owners’ proposal
Firm price: 100 – Q
Firm output: Q
Total revenue: 100Q – Q^2
Firm profit: 100Q – 1.5Q^2
CEO compensation: 10%
Remaining profit for owners: 90Q – 1.35Q^2
2.My proposal
The firm attains its maximum revenue by selling 50 units. Therefore, I propose that the company should approve the 20% that the CEO demands provided that the firm makes sales of at least 50 units. In other words, the firm should maximize revenue by ensuring that MR = 0. For MR to be equal to zero, the firm must sell at least 50 units. In this regard, therefore, the firm will guarantee the CEO her proposed percentage provided that the firm makes a sale of at least 50 units.
Demonstration
Firm price: 100 – Q
Firm output: Q
Total revenue: 100Q – Q^2
Firm profit: 1250
CEO compensation: 20%
Remaining profit for owners: 1000
3.Maximum price charge for consulting services.
$ 125

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