Economics A risk neutral worker has a reservation wage of 500 and a cost of high effort of 187. Depending on the effort put by the worker and some random luck factor, the employer will earn 2500 (if the worker puts high effort and he gets lucky), or 1500 (if the worker puts high effort and he gets unlucky OR if the worker puts low effort and he gets lucky), or 500 (if the worker puts low effort and he gets unlucky). Assume the worker gets lucky with probability 0.4. The employer wants to incentivize the worker to put high effort and decides to pay the worker an incentive contract comprised of a fixed wage of $500 plus a bonus paid only if the profit of 2500 is realized. Calculate the optimal such bonus that the employer should pay, if it wants to incentivize the worker and maximize its profits at the same time. Round your answer to 2 decimals, if needed.

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
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Chapter1: Making Economics Decisions
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Economics
A risk neutral worker has a reservation wage of
500 and a cost of high effort of 187. Depending on
the effort put by the worker and some random
luck factor, the employer will earn 2500 (if the
worker puts high effort and he gets lucky), or 1500
(if the worker puts high effort and he gets unlucky
OR if the worker puts low effort and he gets lucky),
or 500 (if the worker puts low effort and he gets
unlucky). Assume the worker gets lucky with
probability 0.4. The employer wants to incentivize
the worker to put high effort and decides to pay
the worker an incentive contract comprised of a
fixed wage of $500 plus a bonus paid only if the
profit of 2500 is realized. Calculate the optimal
such bonus that the employer should pay, if it
wants to incentivize the worker and maximize its
profits at the same time. Round your answer to 2
decimals, if needed.
Transcribed Image Text:Economics A risk neutral worker has a reservation wage of 500 and a cost of high effort of 187. Depending on the effort put by the worker and some random luck factor, the employer will earn 2500 (if the worker puts high effort and he gets lucky), or 1500 (if the worker puts high effort and he gets unlucky OR if the worker puts low effort and he gets lucky), or 500 (if the worker puts low effort and he gets unlucky). Assume the worker gets lucky with probability 0.4. The employer wants to incentivize the worker to put high effort and decides to pay the worker an incentive contract comprised of a fixed wage of $500 plus a bonus paid only if the profit of 2500 is realized. Calculate the optimal such bonus that the employer should pay, if it wants to incentivize the worker and maximize its profits at the same time. Round your answer to 2 decimals, if needed.
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