buffet - costs of the largest eaters and then offer deals...

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a. A restaurant decides to offer an all-you-can-eat buffet that is sold for a fixed price. The restaurant discovers that the customers for this buffet are not its usual clientele. Instead, the customers tend to have big appetites. The restaurant loses money on the buffet. Adverse Selection: A pre-contractual information problem. People seeing the buffet prices know how much they are likely to eat, but the restaurant does not. Consequently, the buffet price tends to attract people who will eat a lot of food. There are many potential ways to address this problem. For instance, the restaurant might raise the prices on the buffet to cover the
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Unformatted text preview: costs of the largest eaters and then offer deals for other customers such as being able to fill a smaller plate for a lower price. b. A restaurant owner hires a manager who promises to work long hours. When the owner is out of town, the manager goes home early. This action results in lost profits for the firm. Incentive Problem: Post-contractual information problem. The manager promises to work hard, but once the owner is not around to monitor her, she shirks. Potential solutions include: • providing incentive compensation (for example, a profit-sharing plan), and • increased monitoring....
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This note was uploaded on 08/22/2011 for the course ACCOUNTING 201 taught by Professor Stevejoseph during the Winter '11 term at Aarhus Universitet.

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