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A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship between effort and revenue is shown below. Use this information to answer questions #12 and #13. Low Effort Cost for worker $0 Prob(Rev = $200) = 80% Prob(Rev = $600) = 20% High Effort Cost for worker $40 Prob(Rev = $200) = 20% Prob(Rev = $600) = 80% 12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this labor contract, the firm's expected profit will be a. $224 b. $280 c. $376 d. $416 e. $520

A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship between effort and revenue is shown below. Use this information to answer questions #12 and #13. Low Effort Cost for worker $0 Prob(Rev = $200) = 80% Prob(Rev = $600) = 20% High Effort Cost for worker $40 Prob(Rev = $200) = 20% Prob(Rev = $600) = 80% 12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this labor contract, the firm's expected profit will be a. $224 b. $280 c. $376 d. $416 e. $520

Essentials Of Business Analytics
Essentials Of Business Analytics
1st Edition
ISBN:9781285187273
Author:Camm, Jeff.
Publisher:Camm, Jeff.
Chapter6: Data Mining
Section: Chapter Questions
Problem 6P
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A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship between effort and revenue is shown below. Use this information to answer questions #12 and #13. High Effort Cost for worker= $40 Prob(Rev = $200) = 20% Prob(Rev = $600) = 80% Low Effort Cost for worker= $0 Prob(Rev = $200) = 80% Prob(Rev = $600) = 20% 12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this labor contract, the firm's expected profit will be a. $224 b. $280 c. $376 d. $416 e. $520 13. What's the smallest percentage of revenue the firm can offer to incentivize the worker to choose high effort? a. 6% b. 10% с. 16.7% d. 20% е. 33.3%
Transcribed Image Text:A risk-neutral worker can choose to exert either low or high effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm - either $200 or $600. The relationship between effort and revenue is shown below. Use this information to answer questions #12 and #13. High Effort Cost for worker= $40 Prob(Rev = $200) = 20% Prob(Rev = $600) = 80% Low Effort Cost for worker= $0 Prob(Rev = $200) = 80% Prob(Rev = $600) = 20% 12. Instead of offering a flat wage, the manager offers the worker 20% of the firm's realized revenue. Given this labor contract, the firm's expected profit will be a. $224 b. $280 c. $376 d. $416 e. $520 13. What's the smallest percentage of revenue the firm can offer to incentivize the worker to choose high effort? a. 6% b. 10% с. 16.7% d. 20% е. 33.3%
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