Answer to Question #123713 in Macroeconomics for Albert

Question

Recently, the owner of KFC Franchise decided to change how she compensated her
top manager. Last year, the manager received a fixed salary of GHC50,000 and KFC
made GHC110,000 in profits (excluding the manager’s compensation). She feared
that her store’s performance was connected to the top manager shirking on the job
and expected that changes to her top manager’s compensation structure would
improve sales. Therefore, this year she decided to offer him a fixed salary of $40,000
plus 5 percent of the store’s profit. Since the change, the store is performing much
better, and she forecasts profits this year to be $300,000 (again, excluding the
manager’s compensation). Assuming the change of compensation is the reason forthe increased profits, and the forecast is accurate, how much more money will the
owner make (net of payment to her top manager) because of this change?
Does the manager make more money under the new payment scheme?

Answer 1

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