Answer to Question #127574 in Economics for Ravi

Question

Peter, the owner makes the same offer to the manager at each of his stores: “at the end of the year, give me $100,000 and you can keep any additional profit.”

Ann, a manager at one of the stores gladly agrees knowing that the total profit at the store will substantially exceed $100,000 if it is well run.

a. Draw a graph or diagram showing the total profit and manager’s profit.

b. If she is interested in maximizing her personal earnings, will Ann act in a manner that maximize the store’s total profit?

Answer 1

a.In the graph below, the abscissa shows the amount of goods sold, and the ordinate shows profit. The total profit is shown in blue, and the manager's profit is shown in red.

b. Ann will strive to maximize the store's profits, as she must give a fixed amount at the end of the year to the owner who does not otherwise consider paying for her work.