7 Decentralization: You want to introduce lean manufacturing at your plant, but you are not sure whether it will work or not. You think that the outcome is equally likely to be great (incremental profit = 10), good ( = 5), ok ( = 1), or bad ( = M with M = 4). Your plant manager, who actually understand manufacturing knows , but he ís known to be lazy, and thus evaluates the project with a biased utility b (where b is his cost of effort to implement the project). Assume that you are risk-neutral, and that the plant manager implements the project when indifferent. (a) As a function of the bias b, should you decide yourself without the input of the plant manager, or should you delegate the decision to the plant manager? (b) Now assume that the bad outcome is actually a disaster, M = 8. How does your answer to part (a) change? Discuss.
7 Decentralization: You want to introduce lean manufacturing at your plant, but you are not sure whether it will work or not. You think that the outcome is equally likely to be great (incremental profit = 10), good ( = 5), ok ( = 1), or bad ( = M with M = 4). Your plant manager, who actually understand manufacturing knows , but he ís known to be lazy, and thus evaluates the project with a biased utility b (where b is his cost of effort to implement the project). Assume that you are risk-neutral, and that the plant manager implements the project when indifferent. (a) As a function of the bias b, should you decide yourself without the input of the plant manager, or should you delegate the decision to the plant manager? (b) Now assume that the bad outcome is actually a disaster, M = 8. How does your answer to part (a) change? Discuss.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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7
Decentralization: You want to introduce lean manufacturing at your plant, but you are not sure whether it will work or not. You think that the outcome is equally likely to be great (incremental profit = 10), good ( = 5), ok ( = 1), or bad ( = M with M = 4). Your plant manager, who actually understand manufacturing knows , but he ís known to be lazy, and thus evaluates the project with a biased utility b (where b is his cost of effort to implement the project). Assume that you are risk-neutral, and that the plant manager implements the project when indifferent. (a) As a function of the bias b, should you decide yourself without the input of the plant manager, or should you delegate the decision to the plant manager? (b) Now assume that the bad outcome is actually a disaster, M = 8. How does your answer to part (a) change? Discuss.
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