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 The cost of low effort is 10 and the cost of high effort is 35. 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? 100 300 300 500

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 The cost of low effort is 10 and the cost of high effort is 35. 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? 100 300 300 500

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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