Megan sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Megan realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Larry and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Megan knows that if they both work hard, Larry will earn $110 on the beach and Megan will earn $240 at her stand, so they will each take home half of their total revenue: $110+$240 = $175. If Larry shirks, he'll generate only $60 in earnings. Megan does not know that Larry estimates his personal cost (or disutility) of working hard as opposed to shirking at $30. Once out of Megan's sight, Larry faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Larry's total utility, it is better for him to Taking into account the loss in utility that working hard brings to Larry, Megan and Larry together shirking. better off if Larry works hard instead of Megan knows Larry will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Larry. The most Megan should be willing to pay Carrie supervise Larry, assuming supervision is sufficient to encourage Larry to work ard, It turns out that Megan's friend Carrue is unavilable that day, so Megan cannot find a reliable person to watch Larry. Which of the following arrangements will ensure that Larry works hard without making Megan any worse off than she is when Larry shirks? Pay Larry $20, regardless of how many bottles of water he sells O Make Larry promise to work hard O Allow Larry to keep 57% of the revenue from the bottles of water he sells instead of 50% O Allow Larry to keep 75% of the revenue from the bottles of water he sells instead of 50%
Megan sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Megan realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Larry and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Megan knows that if they both work hard, Larry will earn $110 on the beach and Megan will earn $240 at her stand, so they will each take home half of their total revenue: $110+$240 = $175. If Larry shirks, he'll generate only $60 in earnings. Megan does not know that Larry estimates his personal cost (or disutility) of working hard as opposed to shirking at $30. Once out of Megan's sight, Larry faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Larry's total utility, it is better for him to Taking into account the loss in utility that working hard brings to Larry, Megan and Larry together shirking. better off if Larry works hard instead of Megan knows Larry will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Larry. The most Megan should be willing to pay Carrie supervise Larry, assuming supervision is sufficient to encourage Larry to work ard, It turns out that Megan's friend Carrue is unavilable that day, so Megan cannot find a reliable person to watch Larry. Which of the following arrangements will ensure that Larry works hard without making Megan any worse off than she is when Larry shirks? Pay Larry $20, regardless of how many bottles of water he sells O Make Larry promise to work hard O Allow Larry to keep 57% of the revenue from the bottles of water he sells instead of 50% O Allow Larry to keep 75% of the revenue from the bottles of water he sells instead of 50%
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. Understanding how shirking decreases team output
Megan sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Megan realizes
that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named
Larry and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of
the day. Megan knows that if they both work hard, Larry will earn $110 on the beach and Megan will earn $240 at her stand, so they will each take
$110+$240
home half of their total revenue:
= $175. If Larry shirks, he'll generate only $60 in earnings. Megan does not know that Larry estimates his
2
personal cost (or disutility) of working hard as opposed to shirking at $30.
Once out of Megan's sight, Larry faces a dilemma: work hard (put in full effort) or shirk (put in low effort).
In terms of Larry's total utility, it is better for him to
Taking into account the loss in utility that working hard brings to Larry, Megan and Larry together
shirking.
better off if Larry works hard instead of
Megan knows Larry will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Larry. The most Megan should be willing to
pay Carrie to supervise Larry, assuming supervision is sufficient to encourage Larry to work hard, is
It turns out that Megan's friend Carrue is unavilable that day, so Megan cannot find a reliable person to watch Larry. Which of the following
arrangements will ensure that Larry works hard without making Megan any worse off than she is when Larry shirks?
Pay Larry $20, regardless of how many bottles of water he sells
O Make Larry promise to work hard
Allow Larry to keep 57% of the revenue from the bottles of water he sells instead of 50%
O Allow Larry to keep 75% of the revenue from the bottles of water he sells instead of 50%
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