. Information for questions 21 and 22: A worker in a firm can choose one of twoeffort levels, e E {1,2}.• If the worker chooses low effort, e = 1, then the firm generates a revenue of 9 withprobability p1 = 1/6. With probability 1– P1 = 5/6, the firm's revenue is just 0.• If the worker chooses high effort, e = 2, then the firm generates a revenue of 9with probability p2 = 5/6. With probability 1 – P2 = 1/6, the firm's revenue isjust 0.The firm offers a constant wage (that is, there is no bonus for performance). The utilityof a worker if he accepts the job offer, given the chosen effort level and the wage, isU(e, w) = 2w – e?. There is the option of not accepting the job, which gives the workera utility level of 0. The firm maximizes expected profits (that is, it is risk neutral)21. Suppose that the firm can observe the effort chosen by the worker and specify a desiredlevel of effort in the contract (such that, if the worker accepts the job but does not putin the required effort level, the worker earns no income). Calculate the wage offereddivided by the expected revenue of the firm.(a) 4/3(b) 4/15(c) 1/15(d) 8/15(e) 1/3Solution: b22. Suppose now that the firm CANNOT observe the effort chosen by the worker. Calculatethe wage offered divided by the expected revenue of the firm.(a) 1/311(b) 4/15(c) 1/15(d) 4/3(e) The firm does not try to hire the worker in this case.Solution: a

Worker can be of two types based on his efforts : e = 1 , e = 2 Utility of worker : U = 2w - e2…

Information for questions 21 and 22: A worker in a firm can choose one of two effort levels, e € {1, 2}. • If the worker chooses low effort, e = 1, then the firm generates a revenue of 9 with probability pi = 1/6. With probability 1 – P = 5/6, the firm's revenue is just 0. • If the worker chooses high effort, e = 2, then the firm generates a revenue of 9 with probability p2 = 5/6. With probability 1 – p2 = 1/6, the firm's revenue is just 0. The firm offers a constant wage (that is, there is no bonus for performance). The utility of worker if be accents the joh offer given the chosen offort lovel end the wege is

Information for questions 21 and 22: A worker in a firm can choose one of two effort levels, e € {1, 2}. • If the worker chooses low effort, e = 1, then the firm generates a revenue of 9 with probability pi = 1/6. With probability 1 – P = 5/6, the firm's revenue is just 0. • If the worker chooses high effort, e = 2, then the firm generates a revenue of 9 with probability p2 = 5/6. With probability 1 – p2 = 1/6, the firm's revenue is just 0. The firm offers a constant wage (that is, there is no bonus for performance). The utility of worker if be accents the joh offer given the chosen offort lovel end the wege is

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 17.5IP

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