A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship between effort and revenue is shown below. Use this information to answer questions #12 and #13. Low Effort Cost for worker $0 Prob(Rev = $200) = 80% Prob(Rev = $600) = 20% High Effort Cost for worker $40 Prob(Rev = $200) = 20% Prob(Rev = $600) = 80% 12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this labor contract, the firm's expected profit will be a. $224 b. $280 c. $376 d. $416 e. $520
A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship between effort and revenue is shown below. Use this information to answer questions #12 and #13. Low Effort Cost for worker $0 Prob(Rev = $200) = 80% Prob(Rev = $600) = 20% High Effort Cost for worker $40 Prob(Rev = $200) = 20% Prob(Rev = $600) = 80% 12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this labor contract, the firm's expected profit will be a. $224 b. $280 c. $376 d. $416 e. $520
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's
action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship
between effort and revenue is shown below. Use this information to answer questions #12 and #13.
High Effort
Cost for worker= $40
Prob(Rev = $200) = 20%
Prob(Rev = $600) = 80%
Low Effort
Cost for worker= $0
Prob(Rev = $200) = 80%
Prob(Rev = $600) = 20%
12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this
labor contract, the firm's expected profit will be
a. $224
b. $280
c. $376
d. $416
e. $520
13. What's the smallest percentage of revenue the firm can offer to incentivize the worker to choose high effort?
a. 6%
b. 10%
с. 16.7%
d. 20%
е. 33.3%
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