1. Burger Thing is a franchiser of fast-food restaurants. Each of its restaurants is managed independently. Each restaur
Posted: Wed Apr 27, 2022 12:12 pm
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?
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?