When a company hires a new employee, they must determine an appropriate wage based on the productivity of that employee.  If they pay the employee too little, then the employee will leave after a short time and the company will have to repeat the search, hiring, training, etc.  If they pay the employee too much, they will have to terminate that employee to avoid financial losses to the company.  Businesses look for credible signals such as education, training, and/or experience to indicate how productive an employee will be.  What signals does experience communicate? Assume that you are considering hiring a new employee who has worked at an unrelated job for six years.  When you call the previous employer all they will say is that the employee worked there for six years.  Based on the confirmed experience, what do you know about the employee?

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…

Suppose you manage a factory with ten workers. Each worker’s output is determined by the equation q = e. Output sells in the market for a price of 40. The firm has fixed cost equal to 800, and variable costs aside from labor are 8 per unit of output. Worker utility is U = w – e2. Suppose you are paying workers a wage equal to bq. What is the profit- maximizing value of b? Suppose that the probability of worker error increases as the worker increases effort, and that worker error results in unusable output. Suppose that the probability of worker error is Pr[Error] = e/10. Then for worker effort level e, expected (usable) output is now determined by the equation E[q] = (1-Pr[Error]) x e. However, the problem is that you cannot detect errors until after the product is shipped to customers, meaning you pay workers for output before you know whether it is usable or not, and you have to refund your customers for unusable output. Demonstrate why you should not pay your workers the same…

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 20% chance of actually realizing that cost reduction and a 80% chance of realizing no cost reduction. Assume the customer has an initial total cost of $200. 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 $12.00. The information asymmetry stems from the fact that the ______(sales rep or buyer)    has less information about the efficacy of the accounting system than does the  ______(sales rep or buyer)   . At this price, the…