Consider the following example. A risk-neutral worker can choose high or low effort. The worker's outside option is 0. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). 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: $11 probability of low revenue ($100): 25% probability of high revenue ($200): 75% The manager offers a contract which gives the worker a flat wage of $10 and a bonus of $20 if revenue is high. Given this payment scheme, the worker will put in effort. The contract (is/is not) ✓incentive compatible. The firm's expected profit is $ 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 $11 to $9. 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.

Consider the following example. A risk-neutral worker can choose high or low effort. The worker's outside option is 0. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). 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: $11 probability of low revenue ($100): 25% probability of high revenue ($200): 75% The manager offers a contract which gives the worker a flat wage of $10 and a bonus of $20 if revenue is high. Given this payment scheme, the worker will put in effort. The contract (is/is not) ✓incentive compatible. The firm's expected profit is $ 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 $11 to $9. 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Halsen, a marketing manager at Business X, has determined four possible strategies (X1, X2, X3, and X4) for promoting the Product X in London. She also knows that major competitor Product Y has 4 competitive actions (Y1, Y2, Y3 and Y4) it’s using to promote its product in London, too. Ms. Halsen has no previous knowledge that would allow her to determine probabilities of success of any of the four strategies. She formulates the matrix below to show the various Business X strategies and the resulting profit, depending on the competitive action used by Business Y. Determine which strategy Ms. Halsen should select using, the following decision criteria. Please explain your answer for each strategy. a)Maximax; b)Maximin; c)Minimax regret Business X Strategy Business Y Strategy Y1 Y2 Y3 Y4 X1 25 57 21 26 X2 17 29 20 34 X3 47 31 32 37 X4 35 27 30 35
Suppose there are two types of people, high ability and low ability. A high-ability person's productivity is valued at wH = $100,000, while a low-ability person's productivity is valued at wL = $50,000. Assume that the employer does not know the ability of a job applicant, but knows that the probability of an applicant being high ability is 50%. Assume next that only high ability applicants can send a signal, i.e., obtain a degree. The employer pays the expected wage. i. What is the wage oer in a pooling equilibrium (no applicant attains a degree)? ii. What is the wage oer in a separating equilibrium (only high-ability applicants attain a degree)? iii. Suppose now both types can attain a degree, but it is costlier to attain for low-ability people and costs them cL = $60,000, while it costs high-ability people cH = $40,000. Is a separating equilibrium where only high-ability people send education as a signal possible? Explain.
please only do: if you can teach explain each part
A store manager must hire a clerk to work in her store. The sales of the store are uncertain and also a function of how hard the clerk works. If the clerk works hard (high effort) then there is a 75% chance that sales will be $500 per day and a 25% chance that they will be $100 per day. If the clerk does not work hard (low effort) then there is only a 25% chance that sales will be $500 and a 75% chance that they will be $100. The store manager is risk neutral and her utility is the expected profits of the store i.e.U^Manager = Expected (Sales – Wages). The clerk is risk averse. In addition, the clerk does not like to work hard so exerting high effort lowers her utility. Her utility function is given by U^clerk(w,e)=w^0.5-e where e is either 0 (low effort) or 4 (high effort). Finally, assume that the clerk could work somewhere else where her total utility would be 10. Thus, she will only work in this store if the total utility of working here is at least 10. Below, assume that if the…
Consider a worker who works for at most two periods (say, when young and when old) at a particular firm. Each period, the worker can choose between exerting high effort and exerting low effort. The worker's cost of exerting high effort are Cy when young and Co when old. The worker's cost of exerting low effort are zero. The effort of the worker is difficult to observe by the firm. With probability T, the firm observes the worker's effort at the end of a period. With the remaining probability, the firm does not observe the worker's effort. The firm can only fire the worker when it observed that the worker has shirked. In that case, the firm is also allowed to withhold the worker's wage for the period in which the worker was caught shirking. When exerting high effort, the worker's productivity is q, when young and q, when old. When exerting low effort, the worker's productivity is zero. The worker's value of alternative job opportunities is when young and v, when old. For simplicity, the…
Q1) An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets.
Given a choice between two investments with the same expected payoff: a. Most people will choose the one with the lower standard deviation b. Most people will opt for the one with the higher standard deviation c. Most people will be indifferent since the expected payoffs are the same d. Most people will calculate the variance to assess the relative risks of the two choices
Airline passengers arrive randomly and independently at the passenger-screening facility at a major international airport. The mean arrival rate is 11 passengers per minute. a. Compute the probability of no arrivals in a one-minute period (to 6 decimals). b. Compute the probability that three or fewer passengers arrive in a one-minute period (to 4 decimals). c. Compute the probability of no arrivals in a 15-second period (to 4 decimals). d. Compute the probability of at least one arrival in a 15-second period (to 4 decimals).
A fair health insurance contract means that the expected payout is equal to the premium the expected income is equal to the difference between the expected loss and the expected payout the expected loss is equal to the expected payout the premium is equal to the expected income Consider an individual who has a healthy state income of $10,000 and a sick state income of $2,000. The probability of illness is 30%. If the individual is going to be better off with an insurance contract, it must be that their expected income does not change the insurance contract is full there is not enough information their expected utility does not change
Mr. Smith can cause an accident, which entails a monetary loss of $1000 to Ms. Adams. The likelihood of the accident depends on the precaution decisions by both individuals. Specifically, each individual can choose either “low" or "high" precaution, with the low precaution requiring no cost and the high precaution requiring the effort cost of $200 to the individual who chooses the high precaution. The following table describes the probability of an accident for each combination of the precaution choices by the two individuals. Adams chooses high precaution Adams chooses low precaution Smith chooses low precaution 0.8 0.5 Smith chooses high 0.7 0.1 precaution Question: For each of the following tort rules, (i) construct a table describing the individuals’ payoffs under different precaution pairs and (ii) find the equilibrium precaution choices by the individuals. a) No liability b) Strict liability (with full compensation) c) Negligence rule (with efficient legal standard of care) d)…
Industry standards suggest that 12 percent of new vehicles require warranty service within the first year. University Toyota in Morgantown, WV sold 10 Toyotas yesterday. What is the probability that exactly one of these vehicles will require warranty service?
Calculate absolute and relative risk aversion for U(x)=ln(x) and U(x)=-e-x where wealth is (w)