Maximizing Profit Through Managerial Compensation

Effort-based Payment Method

1. a)

Figure 1: Demand and Supply Curve

(Source: As Created by author)

As it can be observed from the above stated demand and supply curve the market will be assumed at the equilibrium level if the price of the quantity demanded is 4.20 per unit. At a price higher than the market equilibrium demand will be less than 8835 unit with a price of 4.20 per unit. From the above stated graphics it can be said that the demand contracts inward along the curve and the supply extends outside along the curve. Both changes of demand and supply curve are known as the movement along the demand or supply curve in relation to the price change.

b. Profit maximization can be defined as the short term or long run process through which a firm determines the price of an output level returns the greatest amount of profit. Any cost incurred in the production of Khat can be classified under the two heads namely fixed costs and the variable costs. These might include costs that cannot increased or decreased during the short run. Variable cost may change with the quantity of Khat and materials consumed at the time of production generally possess the largest impact on the production of Khat. The profit maximizing level of output is considered when Khat is represented as the one where the total revenue is higher than the total amount of cost. This level of output of Khat is the one where the total profit curve is at the maximum.

c. For dictator to maximise the profit it must determine the price and level of output both in the short run and the long run. The dictator must take into the considerations the total revenue-total cost perspective which relies on the fact that the profit is equivalent to the revenue after deducting the cost. The dictator must focus on the maximising the difference and the marginal revenue or marginal cost perspective that is based on the fact that total profit reaches the maximum level where the amount of marginal revenue is equivalent to cost.  

 2. In essence, there exists two different models namely, Vision and Vision+

Amateur Group

Total Number of members in the group=1200

WTP (Willingness to pay) for Vision is equal to $600

WTP (Willingness to pay) for Vision+ is equal to $800

Professional Group

Total number of members in the group=1200

Willingness to Pay (WTP) for essentially Vision is equal to $900

Willingness to Pay (WTP) for essentially Vision+ is equal to $1600

It is essentially evident from the given problem that the willingness to pay (WTP) for both the groups is diverse and therefore it seems sensible for the corporation to concentrate on particularly the professional group since it exhibits a greater WTP for both the models (Png 2013). However, diverse possibilities are hereby mentioned below:

Decisions of the company

It can be hereby mentioned that it is difficult to differentiate between different groups (Bernankeet al. 2015). There exists a possibility that the company attempts to capture both the clusters. In this particular case, pricing of Vision would have been equal to $600 and pricing of Vision+ would have been equal to $800. It is hereby supposed that 50% of the consumers belonging to each group purchase vision and the remaining 50% purchase vision+, then the net profit would amount to $240000 (600*100+600*100+600*100+600*100). Another alternative is that price can be set as per the professional group and therefore Vision prices equals $900 and Vision+ prices equals $1600. Thus, the resulting profit becomes $780000 (600*400+600*900). ‘

Potential Losses with Hiring Specialized Managers

Decision of the company –One model

In case if the corporation decides to employ only one model, then evidently it need to be Vision+ since it can help in yielding greater profits. As it is possible for the corporation to differentiate between different groups, therefore, price discrimination can be taken into consideration (Froeb et al. 2015). However, in this case, the alternative for each of the members of the group is to buy the Vision+. Therefore, profit amounts to $1200000 (1200*100+1200*900).

Based on the above analysis, it is evident that the corporation need to employ the Vision+ model in the market. In addition to this, the company also needs to charge $800 from different amateur clients and $1600 from essentially the professionals for this particular product in a bid to optimize profits.

3. a) As per the given case, it is apparent that the current bid is essentially equal to $50 for the specific ticket, whilst for the WTP for this definite ticket is $100. Even though, it is possible to place any bid amount above $50, it is feasible to place the bid amount at $100. As such, this is because it is considered to be the maximum intrinsic value that the ticket possess. Disbursement of any amount above this price implies that the whole payoff can be negative that is plainly undesirable. However, in case if the bid is placed at an amount that is lower than $100, then the overall pay off can be augmented in the positive course, although there remains greater risk of losing the entire auction for a particular price that I consider to be worth disbursing for the ticket. As regards the winner curse, I don’t think that it can be considered to be a problem on condition that the bidder is mindful of the WTP and makes certain that bid does not exceed the specific amount. In essence, the winner’s curse actually becomes pertinent at the time when the pay-off is negative for the particular individual (Ichiishiet al. 2014).

In particular, the bidding approach does not rely on the total number of bidders and irrespective of the total number of bidders the WTP for each one of the bidders can be potentially different.

3. b) In this particular case, I would like to wait before submitting the bid as this can confirm that it is higher than the ongoing bid. Therefore this delivers an opportunity to win the ticket for the concert. Nevertheless, it also helps in making it certain that in case if I need to resell the ticket through eBay, then I would probably get the chance of recovering similar price. Subsequently, this would lead to low amount of negative pay offs. As such, in this specific case, the total number of bidders can also affect the bid as this directs towards potentially greater amount of competition and higher bid (Thomasand Maurice2015).

4. a) The external opportunity cost for different managers is essentially equal to $2000, therefore after adjustment for the effort, the disbursement for low, medium as well as high effort would amount to $2000, $5000 as well as $8500 respectively. In essence, the primary objective is to make certain that the levels of payments are appropriate for maximization of profits (Thomas and Shughart 2013). However, it is evident from the given case when the corporation recruits highly specialised managers, the company can incur losses since the compensation of different managers is higher than the overall net revenue (Webster 2014). In essence, the ultimate case is a manager having medium level of effort as the incremental level of payment would amount to $3000, however, the increased net revenue can amount to $4000.

Determining Salary Benchmark through Hit-and-Trail Method

Utilizing the method of hit and trail, it can be ascertained that the fixed payment would amount to $500 whilst the percentage share in net revenue would be around 75%. Therefore, for specifically low effort, the salary disbursed to the manager can be calculated to be $2000 (500+75%*2000). In addition to this, for the medium effort, the salary disbursed to the manager can be enumerated to be $5000(500+75%*6000). The salary benchmark for a high effort manager in that case would not get satisfied. However, it is good for the company if the high effort manager is not selected as selection of high effort managers can lead to negative profits.

b) As per the given case, it can be said that the opportunity cost is essentially equal to $700 for manager 2. Therefore, after adjustment for the effort, the disbursement for the low, medium as well as high effort would amount to $700, $1600 as well as $3700 respectively. However, for manager 2, the high effort would necessarily not be reasonable as the enhancement in salary would be relatively higher than the rise in added revenue. Alike manager 1, the optimum level of effort from the viewpoint of the corporation is essentially medium. In essence, the terms of contract mentioned in list a can deliver additional payment in comparison to the minimum benchmark (Kaushik2016).

Particularly, for manager 3, the specific opportunity cost amounts to $700 and therefore after adjustment for the effort, the disbursement for specifically low, medium as well as high effort can amount to $100, $600 as well as $4100. For particularly manager 3, the high effort would not be feasible as rise in salary would be relatively greater than the increase in added revenue. Alike manager 1, the optimum level of effort is medium from the viewpoint of the corporation. However, the terms of the agreement mentioned in part a can necessarily deliver additional payment as compared to the minimum standard. In view of the above, it can be hereby said that the contract mentioned in part a need to be discontinued since it does not direct towards optimum consequences.

c) Actually, the strategy formulated in part a does not operate in part b. Therefore, a novel strategy needs to be properly developed. In essence, the main objective of this particular strategy is to make certain that the strategies deliver the maximum profits from the medium effort typefor all the three different categories of managers (Kaushik2016).

Therefore, salary for particularly manager 1 operating under medium effort=$5000

Salary for particularly manager 2 operating under medium effort=$1600

Salary for specifically manager 3 operating under medium effort=$600

Grounded on considerations of different hit and trial methods it can be said that fixed payment need to be equal to -$1000, whilst 100% of the net revenues need to be disbursed. In each of the particular cases, a total sum of around $1000 can be saved while making certain that deviation from the minimum salary is the minimum.

Salary for manager 1 with Medium Effort can be calculated to be $5000 (100%*6000-1000)

Salary for manager 2 with medium effort can be enumerated to be $1700 (100%*2700-1000)

Salary for manager 3 with medium effort can be calculated to be $1000 (100%*2000-1000)

Therefore, the corporation can make over payments. Visibly, the above mentioned strategy can ensure that high effort as well as low effort managers are not hired. Therefore, only the medium effort managers can be hired for each position.

5.a) It is evident from the given pay off matrix for two different spiders that the best response is essentially the fight option as this leads to maximization of the output (Png2013).The only probable candidate for the dominant strategy is particularly fight. In essence, the best response to fight has the requirement that x needs to be greater than 0.

b) The necessary condition for Prisoners’ dilemma is that there need to be an equilibrium of dominant policy for the particular game. In addition to this, it is also necessary that this specific equilibrium need to be Pareto inferior to specific pay off sets. In particular for certain values of both x and y, lying between 0 and 5 (not including the both), (fight, fight) would become the dominant strategy equilibrium. Nevertheless, each one of the spiders might probably have higher pay offs, particularly in case when both necessarily back down.

c) In particular for spider 1, the best reaction to fight is essentially to back down and therefore there is always an absence of any specific dominant strategy for this specific spider. However, in case of spider 2, the dominant strategy would be to fight and therefore the strategy of back down for this spider that is larger can be eliminated. As per the results of the 2*1 game, the alternative of back down obviously dominates the option of fight in case of smaller spider. Consequently, an exclusive solution is provided by IEDS particularly in the form of back down as well as fight.

References

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Froeb, L.M., McCann, B.T., Ward, M.R. and Shor, M., 2015. Managerial Economics. Cengage learning.

Ichiishi, T., Neyman, A. and Tauman, Y. eds., 2014. Game theory and applications. Academic Press.

Kaushik, M., 2016. Managerial Economics: Elasticity of Demand Case Study.

Png, I., 2013. Managerial economics. Routledge.

Thomas, C. and Maurice, C., 2015. Managerial economics: Foundationsof Business Analysis and Strategy, 12. izdanje.

Thomas, C.R. and Shughart, W., 2013. The Oxford handbook of managerial economics. Oxford University Press.

Webster, T.J., 2014. Managerial Economics: Tools for Analyzing Business Strategy. Lexington Books.