Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 15

Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of $100,000. When this same manager is given an annual, fixed salary of $100,000 and 4 percent of the firm's profits-amounting to $130,000 per year-the manager chooses to work eight hours and shirks for two hours. Explain which of the compensation schemes the manager prefers.