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Satsume Satsume
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Trisha's Fashion Boutique is considering a profit sharing arrangement with her employees.  Currently, the employees receive an annual bonus.  In a "Boom" market, Trisha can sell all the output she produces for $225 per unit.  In a "Bust" market, Trisha can sell all the output she produces for $125 per unit.  The probability of a "Boom" market is 75% and the probability of a bust market is 25%.  Trisha's total cost function (including bonus payments to employees) is: TC(Q) = 75Q + 2.5Q2.  The marginal cost function is: MC(Q) = 75 + 5Q.  The profit sharing plan would pay employees 30% of profits.  However, due to greater cost saving initiatives from employees, Trisha's total cost function becomes: TC(Q) = 50Q + 2Q2.  The relevant marginal cost function becomes: MC(Q) = 50 + 4Q.  Which plan offers Trisha the greatest expected profits for herself?  Suppose the employees will only approve a profit sharing plan if they are guaranteed their portion of profits will be at least $400.  Will the employees approve of the profit sharing program?
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Microeconomics

Microeconomics


Edition: 8th
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Bart_argBart_arg
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More solutions for this book are available here
The table below displays Trisha's profit maximizing output level and profits under each of the market scenarios.



The following table lists Trisha's employees' portion of the profits under the profit sharing program.



Since the profit sharing plan provides only $210.94 in a "Bust" market, the employees will not approve of the plan.
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Satsume Author
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5 years ago
This helped my grade so much Perfect
Goku935
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Thanks for your help!!
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Thanks
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