Paula hires Alfred to manage her store. The left column of the table below shows Alfred’s possible effort levels—low and high. Alfred’s personal disutility in terms of dollars depends on his effort level is shown in the second column. The two right columns show the different profits to Priscilla (before paying Alfred’s salary and ignoring his cost of effort) under Low- and High- demand conditions. effort level alfreds cost to effort low demand profit high demand profit low $0 $20 $60 high $10 $60 $100 It is equally likely that demand will be High or Low: chances are 50/50, regardless of how much effort Alfred exerts. They consider two possible contracts: i. Fixed Wage: Alfred receives a fixed wage of $15 ii. Profit Sharing: Alfred receives a share x of the store’s profits but no wage. Assume, to simplify matters, that both Alfred and Paula are risk neutral. Calculate the net expected payoffs for Alfred and Paula under each possible contract offered by Paula and effort level exerted by Alfred. Which of the following alternatives is correct? (a) For Alfred, the fixed wage net payoffs are 15 for any effort level (low or high) (b) For Alfred, the profit-sharing net payoffs are x for any effort level (low or high) (c) For Paula, the fixed wage net payoffs are 50 if low effort and 70 if high (d)For Paula, the profit-sharing net payoffs are 40(1−x)if loweffort and 80(1−x) if high

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter23: Price-searcher Markets With Low Entry Barriers

Section: Chapter Questions

Problem 17CQ

See similar textbooks

Related questions

Question

Paula hires Alfred to manage her store. The left column of the table below shows Alfred’s possible
effort levels—low and high. Alfred’s personal disutility in terms of dollars depends on his effort
level is shown in the second column. The two right columns show the different profits to Priscilla
(before paying Alfred’s salary and ignoring his cost of effort) under Low- and High- demand
conditions.

effort level	alfreds cost to effort	low demand profit	high demand profit
low	$0	$20	$60
high	$10	$60	$100

It is equally likely that demand will be High or Low: chances are 50/50, regardless of how much
effort Alfred exerts.

They consider two possible contracts:
i. Fixed Wage: Alfred receives a fixed wage of $15
ii. Profit Sharing: Alfred receives a share x of the store’s profits but no wage.

Assume, to simplify matters, that both Alfred and Paula are risk neutral.

Calculate the net expected payoffs for Alfred and Paula under each possible contract offered by
Paula and effort level exerted by Alfred. Which of the following alternatives is correct?
(a) For Alfred, the fixed wage net payoffs are 15 for any effort level (low or high)
(b) For Alfred, the profit-sharing net payoffs are x for any effort level (low or high)
(c) For Paula, the fixed wage net payoffs are 50 if low effort and 70 if high
(d)For Paula, the profit-sharing net payoffs are 40(1−x)if loweffort and 80(1−x) if high

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.