Consider the salary of Mary Sue Nelson, a sales agent for Plain Truth Advertising. She has an effort cost of C = e2 and a reservation wage of $1,500 so that wage package is W = 1,500 + 0.2 Q where the CEO sets the incentive at 0.2 and Q = 200 e. If the CEO increases the incentive from 0.2 to 0.25, what happens to Nelson's effort? Will profits rise or fall?
What will be an ideal response?
Under the 0.2 incentive, Mary Sue's expected benefits are 1,500 + 0.2Q = 1,500 + 0.2(200e) = 1,500 + 40e. Her marginal expected benefit from another hour of effort is therefore 40. Her marginal cost from effort is 2e. Therefore her optimal effort is 40 = 2e or effort is 20 hours., She will earn E(W) = 1500 + 0.2(200(20)) = $2,300. Her output is E(Q) = 200(20) = $4,000 in sales revenue. Expected profit for the company is E(Q ? W) = 4,000 ? 2,300 = $1,700. Solving the problem under the higher incentive of 0.25, her marginal expected benefit is 0.25(200) = 50 and her optimal effort satisfies 50 = 2e or e = 25. Therefore, her effort increases. Expected output increases to Q = 200(25) = $5,000. Expected wages are 1,500 + 0.25(200(25)) = $2,750. Expected profit will rise, in this case, to $2,250.
You might also like to view...
To measure economic welfare, one needs only to measure real GDP
Indicate whether the statement is true or false
What are diseconomies of scale and why might they occur?
What will be an ideal response?
Answer the following statements true (T) or false (F)
1. Over the span of many years, a student and her family invest significant amounts of time and money into that student’s education. It is worth it, because median weekly earnings are about 10% higher for workers who have completed more education. 2. Cooperation between government-funded universities, academies, and the private sector has been shown to delay product innovation and repress whole new industries. 3. All goods and services with positive externalities are also public goods. 4. Government spending and taxes are not the only way to provide public goods. 5. Because nobody owns the ocean, or the creatures that live in it, no one has the ability to protect these resources and ensure they are responsibly harvested.
Even at higher levels of __________, people will still face spending trade-offs, choices, and opportunity costs.
a. savings b. supply c. income d. demand