Consider the case in which Ineffi can observe Dr Knowsbetter's effort. Writedown the participation constraints for the firm and the worker, conditionalon high and low effort, respectively. What level of effort maximizes totalsurplus? (Hint: In your calculations, express the cost of low effort as eį.Replace e = 5, 000 only at the end.) Optimal compensation. Ineffi Inc. is considering hiring Dr Jameela Knows-better to streamline its operations in Northern Montana. If successful, the projectwill yield a payoff of $100,000. If unsuccessful, it will bring a loss of $20,000.The outcome of the project crucially depends on Dr Knowsbetter's effort, whichcan take only two values: High or low. When effort is high, the project is suc-cessful with probability phwith probability piat $15, 000. Exerting low effort costs her $10,000 less than that. In case it doesnot hire Dr Knowsbetter, Ineffi will have to turn to the next best candidate forthe task, that is estimated to bring a net value of $20,000 to the company. If DrKnowsbetter does not get this gig, she will go on a vacation in a Maldives' resortwith her girlfriends. She values the vacation at $20, 000. Assume throughout thatwage compensation must be non-negative.0.9. When effort is low, the project is successful= 0.7. Dr Knowsbetter values the cost of exerting high effort

Consider the case in which Ineffi can observe Dr Knowsbetter's effort. Write down the participation constraints for the firm and the worker, conditional on high and low effort, respectively. What level of effort maximizes total surplus? (Hint: In your calculations, express the cost of low effort as ej. Replace e = 5, 000 only at the end.)

Consider the case in which Ineffi can observe Dr Knowsbetter's effort. Write down the participation constraints for the firm and the worker, conditional on high and low effort, respectively. What level of effort maximizes total surplus? (Hint: In your calculations, express the cost of low effort as ej. Replace e = 5, 000 only at the end.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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