ABC Instrument, 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 4ỏ 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 $0 if they slack off. Even if a salesperson slacks off, he or she requires 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 20,000 + 50,000 Slack Effort 0.2 50,000 Please answer the next queston using the above information. Let "f" be the fixed salary and "b" be the bonus paid if the sales person is successful in selling an instrument. What range of bonuses will induce high effort? O 1.b z 20,000 O 2.b 2 50,000 O 3.b 2 70,000 O 4. b 2 100,000 O 5.b 2 125,000 O 6. b 2 250,000

Q13

In the Hawaiian Beach Boy surf board vendor scenario, what if the fine was increased to $190 but the probability of a fine decreased to one in 20 days, 5%?  What would be the expected value – Exp(RS) --  of continuing to rent surfboards?  Assume the other numbers stay the same.  He makes $300/day and to rent boards from friends costs him $100 a day.  So, he makes $200 a day.  Write out the expected value formula, plug in the numbers, and show the math.  Hint: the Exp(RS) should be higher than the previously calculated $160.

Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 10%. However, the customer has heard this claim before and believes there is only a 30% chance of actually realizing that cost reduction and a 70% chance of realizing no cost reduction. Assume the customer has an initial total cost of $300. According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is .   Suppose the sales representative initially offers the accounting system to the customer for a price of $19.50. The information asymmetry stems from the fact that the    has more information about the efficacy of the accounting system than does the     . At this price, the customer    purchase the accounting system, since the expected…