You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows. Profit Probabilities Profit = $10,000 Profit = $50,000 Lazy 60% 40% Hard worker 20% 80% If Ron is lazy, he will surf the Internet all day, and he views this as a zero-cost opportunity. However, Ron views working hard as a “personal cost” valued at $1,000. What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any “personal cost”. Concept Introduction: The principal−agent problem is the differences of interest and moral hazard matters that occurs when one person (the "agent") is able to make decisions and/or take actions on behalf of, or that impact, another person (the "principal").

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Chapter 8, Problem 24AP

To determine

You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows.

Profit Probabilities
Profit = $10,000 Profit = $50,000
Lazy 60% 40%
Hard worker 20% 80%

If Ron is lazy, he will surf the Internet all day, and he views this as a zero-cost opportunity. However, Ron views working hard as a “personal cost” valued at $1,000. What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any “personal cost”.

Concept Introduction:

The principal−agent problem is the differences of interest and moral hazard matters that occurs when one person (the "agent") is able to make decisions and/or take actions on behalf of, or that impact, another person (the "principal").

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