Scenario 17.5
Consider the following information:
Income to the firm from workers who sell door-to-door
Bad Luck Good Luck
Low Effort (e = 0) $5,000 $7,000
High Effort (e = 1) $7,000 $13,000
Cost of effort: c = $2500e
Probabilities: Bad luck = .75; Good luck = .25
-Refer to Scenario 17.5. If a fixed wage of $3000 is given the individual worker, the result will be:
A) low effort 75% of the time.
B) low effort 25% of the time.
C) low effort.
D) high effort.
E) high or low effort depending on whether the worker thinks the $3000 is an acceptable wage.

Question

Quizplus · Accepted Answer

Given a fixed wage of $3000, the worker has no incentive to exert high effort since the cost of effort ($2500) would reduce their net income below the fixed wage for high effort, and they receive the same wage regardless of the outcome. Therefore, the rational choice is to exert low effort to maximize their net income without incurring the cost of effort.

Scenario 17.5 Consider the Following Information