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A manager has a utility function U = C 0.5 if she does not work hard and U = C 0.5 - 3 if she does. Expected profit will increase from 1,000 to 1,500 if she works hard. The manager receives compensation C equal to 144 plus a portion x of any profit in excess of 1,000. What is the value of x that will make the manager indifferent between shirking and working hard?

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Solution Summary

The expert examines utility function and expected profits. The value of x that will make the manager indifferent between shirking and working hard is determined.

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if she does not work hard, she gets 144

her utility is U = (144)^0.5 = ...

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