Paul hires Amy to manage his bakery shop. The following table gives the shop's profits (without subtracting payments to Amy) under 2 different levels of Amy's effort and two different states of the world (good and bad weather). There is a 50% probability that the weather will be good. Bad weather (50%) Good weather (50%) Low Effort High Effort 300 The cost of low effort is 10 and the cost of high effort is 41. Paul offers a fixed salary of 100 and bonus B if revenue is strictly higher than 300. What is the value of the lower bound of B, above which Amy would be incentivized to put in high effort? 100 300 500

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Chapter1: Making Economics Decisions
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Paul hires Amy to manage his bakery shop. The following table gives the shop's profits (without
subtracting payments to Amy) under 2 different levels of Amy's effort and two different states of
the world (good and bad weather). There is a 50% probability that the weather will be good.
Bad weather (50%)
Good weather (50%)
Low Effort
100
300
High Effort
The cost of low effort is 10 and the cost of high effort is 41. Paul offers a fixed salary of 100 and
bonus B if revenue is strictly higher than 300. What is the value of the lower bound of B, above
which Amy would be incentivized to put in high effort?
300
500
Transcribed Image Text:Paul hires Amy to manage his bakery shop. The following table gives the shop's profits (without subtracting payments to Amy) under 2 different levels of Amy's effort and two different states of the world (good and bad weather). There is a 50% probability that the weather will be good. Bad weather (50%) Good weather (50%) Low Effort 100 300 High Effort The cost of low effort is 10 and the cost of high effort is 41. Paul offers a fixed salary of 100 and bonus B if revenue is strictly higher than 300. What is the value of the lower bound of B, above which Amy would be incentivized to put in high effort? 300 500
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