BNP 13.1 (a) (b) (c)Case:• The state is trying to increase enrollment of eligible kids in Medicaid byhiring a subcontractor to register families at the state fair.• The subcontractor has the option of paying $1000 to hire extra workers forthe job (i.e., high effort) but will only choose to do that if it increases theiroverall payoff.• The success of the project depends on both the effort level of thesubcontractor and on whether there is good turnout or bad turnout at the statefair.• The potential benefits of the registration program are estimated as:HighEffort*LowEffortGoodTurnout(Prob. 0.2)$100,000$40,000BadTurnout(Prob. = 0.8)$40,000$20,000To induce high effort, the state offers the contractor a $10,000 bonus payableonly if the benefit reaches $100,000.Questions:(a) Comparing Expected Values with & without the Bonus, Calculate theExpected Benefit to the State from the $10,000 Bonus?(b) Calculate the Expected Benefit to the Subcontractor from the $10,000Bonus?(c) Is Offering the Bonus a Pareto Improvement over Not Offering it?

1. Without the bonus, the expected benefit to the state is calculated as follows:2. With the bonus,…

Questions: (a) Comparing Expected Values with & without the Bonus, Calculate the Expected Benefit to the State from the $10,000 Bonus? (b) Calculate the Expected Benefit to the Subcontractor from the $10,000 Bonus? (c) Is Offering the Bonus a Pareto Improvement over Not Offering it?

Questions: (a) Comparing Expected Values with & without the Bonus, Calculate the Expected Benefit to the State from the $10,000 Bonus? (b) Calculate the Expected Benefit to the Subcontractor from the $10,000 Bonus? (c) Is Offering the Bonus a Pareto Improvement over Not Offering it?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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BNP 13.1 (a) (b) (c)
Case:
• The state is trying to increase enrollment of eligible kids in Medicaid by
hiring a subcontractor to register families at the state fair.
• The subcontractor has the option of paying $1000 to hire extra workers for
the job (i.e., high effort) but will only choose to do that if it increases their
overall payoff.
• The success of the project depends on both the effort level of the
subcontractor and on whether there is good turnout or bad turnout at the state
fair.
• The potential benefits of the registration program are estimated as:
High
Effort*
Low
Effort
Good
Turnout
(Prob. 0.2)
$100,000
$40,000
Bad
Turnout
(Prob. = 0.8)
$40,000
$20,000
To induce high effort, the state offers the contractor a $10,000 bonus payable
only if the benefit reaches $100,000.
Questions:
(a) Comparing Expected Values with & without the Bonus, Calculate the
Expected Benefit to the State from the $10,000 Bonus?
(b) Calculate the Expected Benefit to the Subcontractor from the $10,000
Bonus?
(c) Is Offering the Bonus a Pareto Improvement over Not Offering it?

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Step 2: b) Calculating the Expected Benefit to the Subcontractor from the $10,000 Bonus:

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Step 3: c) Is Offering the Bonus a Pareto Improvement over Not Offering it?

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