Return to the problem 9 above. Casually, we might interpret the story as one in which the manager…
Return to the problem 9 above. Casually, we might interpret the story as one in which the manager receives a bonus when x2 is produced, but no additional reward if even more is produced. Might the manager now be tempted to inventory or otherwise “hide” output in the short-run once enough output has been produced to qualify for the bonus? What (convenient) assumption in the simple model removes this possibility?
problem 9: (This is a continuation of problem 8 above. Now assume there are three possible outputs, x1
Determine an optimal pay-for-performance arrangement. Why has Ralph’s cost gone up, compared with the setting in the original problem? Also, why is the manager now paid more for intermediate than for the most desirable (x3) output?)
