The management of Choices Inc. can pay bonuses for customer service staff based on feedback scores or based on reversed cancellations. Good feedback and reversed cancellations both generate $12,000 in additional profit for the company. A hard-working employab has a 75% chance of getting a positive score, but only a 50% chance of reversing a cancellation. If the employee fails to put in full effort, then the likelihood of a positive score or a reversed cancellation is, in both cases, 25%. Assume an employee's utility function for income w is u(w) sqrt(w), and the effort cost from working hard (in utility units) is 10. With a base wage of 10,000, how much more profitable is Choices Inc. with bonuses based on feedback, instead of reversed cancellations? (L.e. what is the difference in profit if the manager always offers the smallest bonus that will induce the employee to work hard?) $3,000 O$4,500 $9,000 $12,000

The management of Choices Inc. can pay bonuses for customer service staff based on feedback scores or based on reversed cancellations. Good feedback and reversed cancellations both generate $12,000 in additional profit for the company. A hard-working employab has a 75% chance of getting a positive score, but only a 50% chance of reversing a cancellation. If the employee fails to put in full effort, then the likelihood of a positive score or a reversed cancellation is, in both cases, 25%. Assume an employee's utility function for income w is u(w) sqrt(w), and the effort cost from working hard (in utility units) is 10. With a base wage of 10,000, how much more profitable is Choices Inc. with bonuses based on feedback, instead of reversed cancellations? (L.e. what is the difference in profit if the manager always offers the smallest bonus that will induce the employee to work hard?) $3,000 O$4,500 $9,000 $12,000

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 17.2IP

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