A sales employee generates sales revenue of either $1250 or $750, each with equal probability. A...

A sales employee generates sales revenue of either $1250 or $750, each with equal probability. A manager is paying the sales employee 25% of sales revenue, and the sales person has a utility function u(x) = x0.5. What is the lowest fixed salary (ie., independent of sales outcome) the manager can pay the employee instead, so that the sales person is not worse off? (a.)$887 (b.)$667.7 (c.)$453.5 (d.)$246.1

Expert Solution

The correct answer is (d.) $246.1.

The manager will pay the employee that fixed salary (so that Sales employee is not worse off) where Expected utility sales employee will get if A manager is paying the sales employee 25% of sales revenue is equal to utility he get if manager gives him a fixed salary F.

Utility If manager gives him fixed salary F is u(F) = F^0.5

Expected utility= P₁u(x₁) + P₂u(x₂)

where P₁ = Probability that he will generate 1250 = 0.5, x₁ = he will get if he generate 1250 = 25% of 1250 = 312.5, P₂ = Probability that he will generate 750 = 0.5, x₂ = he will get if he generate 750 = 25% of 750 = 187.5

Hence, Expected utility= P₁u(x₁) + P₂u(x₂) = 0.5u(312.5) + 0.5u(187.5)

=> Expected utility(EU)= 0.5*312.5^0.5 + 0.5*187.5^0.5 = 15.685

We want this EU to be equal to Utility If manager gives him fixed salary F = u(F)

=> EU = u(F) => F^0.5 = 15.685 => F = 246.1

So, the manager can pay the employee instead, so that the sales person is not worse off is $246.1

Hence, the correct answer is (d.) $246.1.

Rahul Sunny answered 7 months ago

A project currently generates sales of $9million, variable costs equal 40% of sales, and fixed costs...

A project currently generates sales of $9million, variable costs equal 40% of sales, and fixed costs are $1.8 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items. a. What are the effects on cash flow if sales increase from $9million to $9.9m? (Input the amount as positive value. Enter answer in dollars not millions) b. What are the effects on cash flow if variable costs increase to 55% of sales? (Input amount as a...

A project currently generates sales of $15 million, variable costs equal 60% of sales, and fixed...

A project currently generates sales of $15 million, variable costs equal 60% of sales, and fixed costs are $3.0 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items. a. What are the effects on cash flow, if sales increase from $15 million to $16.5 million? (Input the amount as positive value. Enter your answer in dollars not in millions.) Cash flow: increases or decreses by __________? b. What are the effects on cash flow,...

A project currently generates sales of $16 million, variable costs equal 50% of sales, and fixed...

A project currently generates sales of $16 million, variable costs equal 50% of sales, and fixed costs are $3.2 million. The firm’s tax rate is 40%. Assume all sales and expenses are cash items. a. What are the effects on cash flow, if sales increase from $16 million to $17.6 million? (Input the amount as positive value. Enter your answer in dollars not in millions.) Cash Flow____ by____ b. What are the effects on cash flow, if variable costs increase...

1-) Papers co. generates €10,000,000 in sales. Its variable costs equal 85.00% of sales and its...

1-) Papers co. generates €10,000,000 in sales. Its variable costs equal 85.00% of sales and its fixed costs are €500,000. Therefore, the company's operating income (EBIT) equals €1,000,000. The company estimates that if its sales were to increase 9.5%, its net income would increase 17.50%. Income tax rate is 35%. What is the company's interest expense? Build the Income statement, do not round intermediate calculations and present them all. 1.2-) Assume that a firm currently has EBIT of €2,000,000, a...

Google with its 20,164 employees generates annual revenue per employee of $1,093,892 and annual profit per...

Google with its 20,164 employees generates annual revenue per employee of $1,093,892 and annual profit per employee of $214,768. Convergys Corp. (CVG) 75,000 employees, on the other hand, is only able to generate annual revenue per employee of $38,855 and an annual profit per employee of -$1,344. Discuss the implications of the difference in RPE of Google and CVG. What can be the possible reasons for this difference?

Question 1 Brandeis, Inc. sells rhombus-shaped widgets and generates $1,000,000 in sales revenue for 2019. If...

Question 1 Brandeis, Inc. sells rhombus-shaped widgets and generates $1,000,000 in sales revenue for 2019. If profit is $195,000, variable costs per unit are $25, and sales volume is 25,000 units, then the break-even point must be: A. 10,000 units B. 12,000 units C. 12,500 units D. 15,000 units E. None of the above.

LUVE produces bracelets. Each band generates $460 in revenue and requires one ounce of gold as...

LUVE produces bracelets. Each band generates $460 in revenue and requires one ounce of gold as an input. LUVE plans to produce and sell one widget in exactly one year. The c.c. risk-free rate is zero percent. LUVE is considering hedging their gold exposure with a long forward contract. The one-year forward price of gold is $420 per ounce. If the spot price of gold is $450 per ounce in one year, what is LUVE's hedged proﬁt? The answer I...

Each round of game played by a gambler is either a win with probability p or...

Each round of game played by a gambler is either a win with probability p or a loss with probability 1 − p. If the round is a win, then a random amount of money having an exponential distribution with rate λ will be awarded to the gambler. If the round is a loss, then he loses everything that had been accumulated up to that time and cannot play any additional rounds. After a win round, the gambler can either...

A project generates $7,000 in revenue each year. It has the following costs: fixed cost:$1,200/year variable...

A project generates $7,000 in revenue each year. It has the following costs: fixed cost:$1,200/year variable cost: 65%of revenue depreciation: $400/year A) If sales increases by 20%, what will be the increase in pretax profits? (Hint: Calculate the base case pretax first then apply the sales growth) B) What is the degree of operating leverage (DOL) for this project?

Each year, Google stock has a return of 10% and 20% with equal probability, and Apple...

Each year, Google stock has a return of 10% and 20% with equal probability, and Apple stock has a return of -10% and 15% with equal probability. The correlation between Google stock return and Apple stock return is 0.8. The risk free rate is 5%.(Note that for each question, you need to show the calculation to earn full credit) a) What is the standard deviation of Google stock’s return? b) What is the standard deviation of Apple stock’s return? You...

Question