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The board of directors of a major corporation is trying to determine how to structure the salary of the new CEO. One option is for the board to offer the new CEO a flat salary of $1 million per year. A second option is to offer a profit-sharing plan with a base salary of $200,000 plus 10% of the firm's profit. If the CEO puts a lot of effort into the job, she will generate a $10 million profit for the firm. If the CEO exerts modest effort, the corporation will earn $7 million in profit. Expending a lot of effort costs the CEO $500,000; expending modest effort costs her $300,000.
a. Draw the extensive-form game tree for the game played between the board and the CEO. Assume that the board moves first, choosing the type of salary offer. Assume that the CEO moves second, choosing her effort level. Be sure to enumerate payoffs to the board (and the shareholders they represent) and the CEO.
b. What is the equilibrium outcome for this game? What kind of contract should the board offer? What level of effort should the CEO choose?
Seven years ago a vertical drill was purchased for $10,000. Drill had 12 years of expected life and zero estimated value at the end of that period. The current market value of the drill is $1,000. The new drill's total investment cost would be $12..
Twenty-six observations are used to obtain the following regression results: DEPENDENT VARIABLE: LNY R-SQUARE F-RATIO P-VALUE ON F OBSERVATIONS: 26 0.3647 4.21 0.0170 VARIABLE PARAMETER STANDARD ESTIMATE ERROR T-RATIO P-VALUE INTERCEPT 2.9957 0.3545 ..
You are a division manager at Toyota. If your Marketing department estimates that the semiannual demand for the Highlander is Q = 100,000 - 1.25P, what price should you charge in order to maximize revenues from sales of the Highlander
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The price earnings ratio for each stock is determined through dividing the value of a share of stock by the earnings per share reported by the firm for the most recent 4-quarters.
Would you expect such information to increase productivity? Why or why not?
Suppose that the signal is no longer available. Which kinds of job will be filled by which types of workers, and at what wages? Who gains and who loses?
In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demands is -1.5 and the advertising is +0.6 would you expect an increase or d..
In offering such training programs, is a company violating the optimality rule? Explain in detail.
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