Shimadzu, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $o if they slack off. Even if a salesperson slacks off, he or sherequires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are: Effort Level Chance of success Cost High Effort 0.4 70,000 Slack Effort 0.2 50,000 1. What level of bonus and fixed payment are required to induce high effort? 2. If shimadzu receives a profit of $300,000 from each sale, what is its expected profit from inducing high effort?

Shimadzu, a manufacturer of precise scientific instruments, relies heavily on the efforts of its local salespeople. Selling an instrument requires either luck, high effort, or some combination of the two. A salesperson who chooses to work hard has a 40 percent chance of selling an instrument in a given year while a salesperson who chooses to slack off has a 20 percent chance. Practically no one manages to sell more than one instrument in a single year. Contracts for salespeople are designed on a year-by-year basis. Sales staff members do not mind risk; they choose employers based only on expected wage and the disutility of effort. Disutility of effort is equivalent to $20,000 per year if they work hard and $o if they slack off. Even if a salesperson slacks off, he or sherequires an average salary of at least $50,000 not to seek alternate employment. Thus, the relevant data are: Effort Level Chance of success Cost High Effort 0.4 70,000 Slack Effort 0.2 50,000 1. What level of bonus and fixed payment are required to induce high effort? 2. If shimadzu receives a profit of $300,000 from each sale, what is its expected profit from inducing high effort?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.6IP

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