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(g) differ? Explain why. Cons sider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neu- tral, not risk averse as in the text, so his expected utility equals his ex- pected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervi- sion on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.

(g) differ? Explain why. Cons sider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neu- tral, not risk averse as in the text, so his expected utility equals his ex- pected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervi- sion on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Can you help solve parts A through C. For part C please refer to the question posted here "Suppose a negative salary is not feasible. If you give a base salary of 0, what payment would you give in the event of success in order to induce high effort and participation?"

(a), (c), and (g) differ? Explain why. U3. Consider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neu- tral, not risk averse as in the text, so his expected utility equals his ex- pected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervi- sion on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.
Transcribed Image Text:(a), (c), and (g) differ? Explain why. U3. Consider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neu- tral, not risk averse as in the text, so his expected utility equals his ex- pected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervi- sion on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.
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