Avedo is considering signing a contract with Pomas to write a novel, which would be due in one year's time, and the two parties are considering the terms of the contract. Everybody understands that the profits (after expenses but before paying Avedo) of the novel are uncertain, but depend on the effort that Avedo expends, as shown in the table below. High effort would require Avedo to hire a nanny for her toddler, which would cost her $20,000 per year. Avedo and Pomas are both risk-neutral. Pomas cannot observe Avedo's effort level. Choose correct answer/answers Probability of $200,000 in Avedo's effort level Probability of $50,000 in profits profits Low Effort 80% 20% High Effort 60% 40% With a profit split contract of 50%, Avedo would put in High Effort. The expected total profits are equal to $80,000 if Avedo puts in Low Effort. A fixed wage contract could induce High Effort as long as the wage is big enough to compensate for Avedo's cost of hiring a nanny. O All of these responses are true.
Avedo is considering signing a contract with Pomas to write a novel, which would be due in one year's time, and the two parties are considering the terms of the contract. Everybody understands that the profits (after expenses but before paying Avedo) of the novel are uncertain, but depend on the effort that Avedo expends, as shown in the table below. High effort would require Avedo to hire a nanny for her toddler, which would cost her $20,000 per year. Avedo and Pomas are both risk-neutral. Pomas cannot observe Avedo's effort level. Choose correct answer/answers Probability of $200,000 in Avedo's effort level Probability of $50,000 in profits profits Low Effort 80% 20% High Effort 60% 40% With a profit split contract of 50%, Avedo would put in High Effort. The expected total profits are equal to $80,000 if Avedo puts in Low Effort. A fixed wage contract could induce High Effort as long as the wage is big enough to compensate for Avedo's cost of hiring a nanny. O All of these responses are true.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Avedo is considering signing a contract with Pomas to write a novel, which
would be due in one year's time, and the two parties are considering the terms
of the contract. Everybody understands that the profits (after expenses but
before paying Avedo) of the novel are uncertain, but depend on the effort that
Avedo expends, as shown in the table below. High effort would require Avedo
to hire a nanny for her toddler, which would cost her $20,000 per year. Avedo
and Pomas are both risk-neutral. Pomas cannot observe Avedo's effort level.
Choose correct answer/answers
Probability of $200,000 in
Avedo's effort level
Probability of $50,000 in profits
profits
Low Effort
80%
20%
High Effort
60%
40%
With a profit split contract of 50%, Avedo would put in High Effort.
The expected total profits are equal to $80,000 if Avedo puts in Low Effort.
A fixed wage contract could induce High Effort as long as the wage is big enough to compensate for Avedo's
cost of hiring a nanny.
All of these responses are true.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1ba5e39d-b222-4b02-9ec6-143ddce93045%2F42e46483-c25f-476a-8e73-7231ff17161a%2Fla839x_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Avedo is considering signing a contract with Pomas to write a novel, which
would be due in one year's time, and the two parties are considering the terms
of the contract. Everybody understands that the profits (after expenses but
before paying Avedo) of the novel are uncertain, but depend on the effort that
Avedo expends, as shown in the table below. High effort would require Avedo
to hire a nanny for her toddler, which would cost her $20,000 per year. Avedo
and Pomas are both risk-neutral. Pomas cannot observe Avedo's effort level.
Choose correct answer/answers
Probability of $200,000 in
Avedo's effort level
Probability of $50,000 in profits
profits
Low Effort
80%
20%
High Effort
60%
40%
With a profit split contract of 50%, Avedo would put in High Effort.
The expected total profits are equal to $80,000 if Avedo puts in Low Effort.
A fixed wage contract could induce High Effort as long as the wage is big enough to compensate for Avedo's
cost of hiring a nanny.
All of these responses are true.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education