1. Burger Thing is a franchiser of fast-food restaurants. Each of its restaurants is managed independently. Each restaur

[answerhappygod]

1. Burger Thing is a franchiser of fast-food restaurants. Each
of its restaurants is managed independently. Each restaurant makes
a profit of $20,000 a month with effort and $12,000 without effort.
Effort costs the manager $3,000 in marketing and extra work. Burger
Thing can choose between three contracts. I – Each manager pays a
royalty of X dollars per month and gets to keep all the profit. II
– Managers get a portion of the profit of ɵ, and Burger Thing gets
the rest, (1 – ɵ). III – Each Manager is paid a fixed salary of
$5,000 per month plus a bonus of B if s/he exerts a high effort. a)
Describe why this is an agency problem (start with a definition).
Explain what type of contact each arrangement is and how they help
overcome moral hazard. b) How large do X, ɵ, and B have to be to
get the manager to operate and exert effort? Show your work. c) If
you owned Burger Thing, which of these contracts would you choose
and why?