7) Manager B Effort Level Chance of success Cost of effort High Effort 0.6 100,000 Routine Effort 0.5 60,000 What is the minimum bonus that will entice high effort? 1. 40,000 2. 260,000 3. 300,000 4. 400,000 5. 520,000 6. 60,000 7. 100,000 8. 0 6) Manager A Effort Level Chance of success Cost of effort High Effort 0.6 300,000 Routine Effort 0.5 260,000 What is the minimum bonus that will entice high effort? 1. 40,000 2. 260,000 3. 300,000 4. 400,000 5. 520,000 6. 60,000 7. 100,000 8. 0
7) Manager B
| Effort Level | Chance of success | Cost of effort |
|---|---|---|
| High Effort | 0.6 | 100,000 |
| Routine Effort | 0.5 | 60,000 |
What is the minimum bonus that will entice high effort?
| 1. |
40,000 |
|
| 2. |
260,000 |
|
| 3. |
300,000 |
|
| 4. |
400,000 |
|
| 5. |
520,000 |
|
| 6. |
60,000 |
|
| 7. |
100,000 |
|
| 8. |
0 |
6) Manager A
| Effort Level | Chance of success | Cost of effort |
|---|---|---|
| High Effort | 0.6 | 300,000 |
| Routine Effort | 0.5 | 260,000 |
What is the minimum bonus that will entice high effort?
| 1. |
40,000 |
|
| 2. |
260,000 |
|
| 3. |
300,000 |
|
| 4. |
400,000 |
|
| 5. |
520,000 |
|
| 6. |
60,000 |
|
| 7. |
100,000 |
|
| 8. |
0 |
5) ABC Instrument, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $0 if they slack off. Even if a salesperson slacks off, he or she requires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are:
| Effort Level | Chance of success | Cost |
|---|---|---|
| High Effort | 0.4 | 20,000 + 50,000 |
| Slack Effort | 0.2 | 50,000 |
Please answer the next using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the sales person is successful in selling an instrument.
If ABC receives a profit of $300,000 from each sale (before paying the compensation for the sales person), what is its expected profit from inducing high effort after paying the compensation?
| 1. |
10,000 |
|
| 2. |
50,000 |
|
| 3. |
100,000 |
|
| 4. |
180,000 |
|
| 5. |
250,000 |
4) ABC Instrument, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $0 if they slack off. Even if a salesperson slacks off, he or she requires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are:
| Effort Level | Chance of success | Cost |
|---|---|---|
| High Effort | 0.4 | 20,000 + 50,000 |
| Slack Effort | 0.2 | 50,000 |
Please answer the next question using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the sales person is successful in selling an instrument.
If ABC receives a profit of $300,000 from each sale (before paying the compensation to the sales person), what is its expected profit from inducing slack effort after paying the compensation?
| 1. |
10,000 |
|
| 2. |
50,000 |
|
| 3. |
100,000 |
|
| 4. |
180,000 |
|
| 5. |
250,000 |
3) ABC Instrument, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $0 if they slack off. Even if a salesperson slacks off, he or she requires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are:
| Effort Level | Chance of success | Cost |
|---|---|---|
| High Effort | 0.4 | 20,000 + 50,000 |
| Slack Effort | 0.2 | 50,000 |
Please answer the next question using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the sales person is successful in selling an instrument.
What is the optimal compensation scheme if ABC wants high effort?
|
b = 20,000 and f = 50,000 |
||
|
b = 50,000 and f = 50,000 |
||
|
b = 50,000 and f = 250,000 |
||
|
b = 100,000 and f = -50,000 |
||
|
b = 100,000 and f = 30,000 |
||
|
b = 250,000 and f = -30,000 |
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