Yvette sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Yvette realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Sean and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Yvette knows that if they both work hard, Sean will earn $100 on the beach and Yvette will earn $200 at her stand, so they will each take home half of their total revenue: $100+$2002=$150$100+$2002=$150. If Sean shirks, he'll generate only $60 in earnings. Yvette does not know that Sean estimates his personal cost (or disutility) of working hard as opposed to shirking at $25. Once out of Yvette's sight, Sean faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Sean's total utility, it is worse for him to Shirk or work hard?. Taking into account the loss in utility that working hard brings to Sean, Yvette and Sean together are/ aren't ? better off if Sean works hard instead of shirking. Yvette knows Sean will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Sean. The most Yvette should be willing to pay Carrie to supervise Sean, assuming supervision is sufficient to encourage Sean to work hard, is 20, 15, 50, 25?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Understanding how shirking decreases team output

Yvette sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Yvette realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Sean and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Yvette knows that if they both work hard, Sean will earn $100 on the beach and Yvette will earn $200 at her stand, so they will each take home half of their total revenue: $100+$2002=$150$100+$2002=$150. If Sean shirks, he'll generate only $60 in earnings. Yvette does not know that Sean estimates his personal cost (or disutility) of working hard as opposed to shirking at $25.

Once out of Yvette's sight, Sean faces a dilemma: work hard (put in full effort) or shirk (put in low effort).

In terms of Sean's total utility, it is worse for him to Shirk or work hard?.

Taking into account the loss in utility that working hard brings to Sean, Yvette and Sean together are/ aren't ? better off if Sean works hard instead of shirking.

Yvette knows Sean will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Sean. The most Yvette should be willing to pay Carrie to supervise Sean, assuming supervision is sufficient to encourage Sean to work hard, is 20, 15, 50, 25?

It turns out that Yvette's friend Carrue is unavilable that day, so Yvette cannot find a reliable person to watch Sean. Which of the following arrangements will ensure that Sean works hard without making Yvette any worse off than she is when Sean shirks?

a)Allow Sean to keep 71% of the revenue from the bottles of water he sells instead of 50%

b)Allow Sean to keep 56% of the revenue from the bottles of water he sells instead of 50%

c)Make Sean promise to work hard

d)Pay Sean $60, regardless of how many bottles of water he sells

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