Question

Duke is a highly skilled negotiator who could work for many law firms. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will___________.

a) be evenly split between Duke and the law firm to maximize surplus.
b) all go to the law firm because the firm bears the risk of running the business.
c) all go to Duke because, if it didn't, another firm could hire Duke away.
d) be split between Duke and the law firm, but how it will be split cannot be determined without more information.

Answer 1

Answer: Be split between Duke and the law firm, but how it will be split cannot be determined without more information.

Explanation: The law firm would have entered into a certain type of contract when signing Duke. Therefore the contract terms would determine how he is paid and also the bonus he would tend to get in times of outstanding performances from Duke the employee.

It's only when the contract terms is known that we can able to determine how much Duke would take home in a situation of an excess profit.