The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be able to earn elsewhere) and still earn an economic profit of $800. The owner's concern is that he will not be able to monitor the manager's behavior and that the manager would therefore be in a position to embezzle money from the business. The owner knows that if the remote office is managed dishonestly, the manager can earn $4,500, which results in an economic loss of $600 per week. (Hint: Construct a decision tree to help you answer the questions below.) a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office? Yes O No b. Suppose the owner knows that a managerial candidate condemns dishonest behavior, and who would be willing to pay up to $7,000 to avoid the guilt she would feel if she were dishonest. Will the owner open the remote office? O No Yes

The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be able to earn elsewhere) and still earn an economic profit of $800. The owner's concern is that he will not be able to monitor the manager's behavior and that the manager would therefore be in a position to embezzle money from the business. The owner knows that if the remote office is managed dishonestly, the manager can earn $4,500, which results in an economic loss of $600 per week. (Hint: Construct a decision tree to help you answer the questions below.) a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office? Yes O No b. Suppose the owner knows that a managerial candidate condemns dishonest behavior, and who would be willing to pay up to $7,000 to avoid the guilt she would feel if she were dishonest. Will the owner open the remote office? O No Yes

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the
new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be
able to earn elsewhere) and still earn an economic profit of $800. The owner's concern is that he will not be able to
monitor the manager's behavior and that the manager would therefore be in a position to embezzle money from the
business. The owner knows that if the remote office is managed dishonestly, the manager can earn $4,500, which results
in an economic loss of $600 per week. (Hint. Construct a decision tree to help you answer the questions below.)
a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office?
Yes
No
b. Suppose the owner knows that a managerial candidate condemns dishonest behavior, and who would be willing to pay
up to $7,000 to avoid the guilt she would feel if she were dishonest. Will the owner open the remote office?
No
Yes

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