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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

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

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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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.
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. O All of these responses are true.
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