3- After years of training, Sara has landed a contract playing professional lacrosse. Eager to leverage her pro status by bringing in endorsements, she asks Jenny MacGuire to be her personal manager. Jenny has offered Sara a choice of two payment plans. Sara can engage Jenny's services for a flat fee of $100,000. Alternatively, Sara can pay Jenny 15% of all endorsement revenue. Sara estimates that if Jenny expends modest effort ($20,000 worth) in her job, she will generate $600,000 in endorsement revenue for Sara. But if Jenny expends high effort ($50,000 worth), she will bring in $1 million in endorsements. a. Suppose Sara agrees to the flat-rate plan. What can Sara expect to receive if Jenny expends modest effort? If Jenny expends high effort? What can Jenny expect to receive in either case? Explain the associated principal-agent problem. Who is the principal? Who is the agent? b. For both possible effort levels, determine the rewards to Jenny and Sara if Sara chooses the 15% plan. What happens to the principal-agent problem if Sara chooses this plan?

3- After years of training, Sara has landed a contract playing professional lacrosse. Eager to leverage her pro status by bringing in endorsements, she asks Jenny MacGuire to be her personal manager. Jenny has offered Sara a choice of two payment plans. Sara can engage Jenny's services for a flat fee of $100,000. Alternatively, Sara can pay Jenny 15% of all endorsement revenue. Sara estimates that if Jenny expends modest effort ($20,000 worth) in her job, she will generate $600,000 in endorsement revenue for Sara. But if Jenny expends high effort ($50,000 worth), she will bring in $1 million in endorsements. a. Suppose Sara agrees to the flat-rate plan. What can Sara expect to receive if Jenny expends modest effort? If Jenny expends high effort? What can Jenny expect to receive in either case? Explain the associated principal-agent problem. Who is the principal? Who is the agent? b. For both possible effort levels, determine the rewards to Jenny and Sara if Sara chooses the 15% plan. What happens to the principal-agent problem if Sara chooses this plan?

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter13: Investing In Mutual Funds, Etfs, And Real Estate

Section: Chapter Questions

Problem 9FPE

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