10. After years of training, Sara has landed a contract playing professional lac

Question

10. After years of training, Sara has landed a contract playing professional lacrosse. Eager to leverage her pro status by bringing in endorsements, she asks Jenny MacGuire to be her personal manager. Jenny has offered Sara a choice of two payment plans. Sara can engage Jenny's services for a flat fee of $ 100,000. Alternatively, Sara can pay Jenny 15% of all endorsement revenue. Sara estimates that if Jenny expends modest effort ($20,000 worth) in her job, she will generate $600,000 in endorsement revenue for Sara. But if Jenny expends high effort ($50,000 worth), she will bring in $1 million in endorsements

Explanation / Answer

The best way of paying Jenny is giving 15% of endorsement revenue. As it is clear if Jenny puts an effort of 50000 worth she will bring 1 million worth which is a high amount. If Sara pays Jenny 100000$ worth we cannot expect that Jenny will bring in endorsement of worth 1 million. It is clear that if Jenny increase his efforts Sara will get more revenue in endorsement. So if Sara gets 1 million endorsement she must pay Jenny 150000$ which is a reasonable payment for the revenue Sara is getting.

So it is better to offer Jenny 15% of total endorsement revenue.

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