How does the level of effort compare with the optimal level

Assignment Help Financial Management

Reference no: EM131087993

A restaurant owner has hired a manager to run the daily operations of her restaurant. Restaurant profits depend on both the manager’s unobservable effort level and random fluctuations in demand. The expected value of restaurant profits if the manager exerts effort, e, is given by e/2. Effort costs the manager 0.25e2. If the risk neutral manager’s salary is a percentage, c, of restaurant profits, how much effort should we expect the manager to exert? What is the optimal value of c from the owner’s perspective? How does the level of effort compare with the optimal level if the manager was also the owner of the restaurant?

Reference no: EM131087993

Questions Cloud

Should it replace the old steamer : The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $650 for five years and $325 for ..

What is the current value of six-month call option : Stock price of A is $80 now. Over each of the next three-month periods it is expected to go up by 10% or down by 7%. The stock has a quarterly dividend yield of 10%. If the risk free rate is 5% p.a., what is the current value of a 6-month call option..

What is the one-year standard deviation : High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 20.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent? A portfolio has a 3-year standard deviation of 18.1..

Suppose the yield on two-year treasury bond : Suppose the yield on a two-year Treasury bond is 5 percent and the yield on a one-year Treasury bond is 4 percent. If the maturity risk premium (MRP) on these bonds is zero (0), what is the expected one-year interest rate during the second year (year..

How does the level of effort compare with the optimal level : A restaurant owner has hired a manager to run the daily operations of her restaurant. Restaurant profits depend on both the manager’s unobservable effort level and random fluctuations in demand. How does the level of effort compare with the optimal l..

Calculate the crossover rate : Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs and IRRs a..

What are the break-even stock prices at expiration : Generous Dynamics stock currently sells for 73.0 dollars per share. Consider the following portfolio of options on Generous Dynamics stock: -- short one call option with strike price 72.0 and price 7.2615 -- short two put options with a strike price ..

What is the delta of call option with strike price : IBM stock currently sells for 84 dollars per share. The implied volatility equals 47.5 percent. The risk-free rate of interest is 4.5 percent continuously compounded. What is the delta of a call option with strike price 83 and maturity of 8 months?

Pairs of portfolios have the same payoff : Which of the following pairs of portfolios have the same payoff?

User Account

All Pages