Consider the following example. A risk-neutral worker can choose high or low effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). The worker has an outside option of 0. The probability of each revenue depends on the worker's effort: Low effort: cost of effort: $0 probability of low revenue ($100) : 75% probability of high revenue ($200) : 25% High effort: cost of effort : $15 probability of low revenue ($100): 25% probability of high revenue ($200): 75% The manager offers a contract which gives the worker 25% of revenue. Given this payment scheme, the worker will put in ✓incentive compatible. The firm's expected profit is $ (is/is not) The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $15 to $13. If it costs the firm $20 to implement this program, the firm's expected profit if they implement the program is $ ✓. The firm ✓ implement the program. く. effort. The contract

Consider the following example. A risk-neutral worker can choose high or low effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). The worker has an outside option of 0. The probability of each revenue depends on the worker's effort: Low effort: cost of effort: $0 probability of low revenue ($100) : 75% probability of high revenue ($200) : 25% High effort: cost of effort : $15 probability of low revenue ($100): 25% probability of high revenue ($200): 75% The manager offers a contract which gives the worker 25% of revenue. Given this payment scheme, the worker will put in ✓incentive compatible. The firm's expected profit is $ (is/is not) The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $15 to $13. If it costs the firm $20 to implement this program, the firm's expected profit if they implement the program is $ ✓. The firm ✓ implement the program. く. effort. The contract

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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