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. Under which of the following payment schemes would workers have an incentive to exert high effort?
A) A guaranteed wage equal to $0
B) A guaranteed wage equal to $5000
C) A guaranteed wage equal to $10,000
D) A wage equal to the income earned, minus $4000
E) A wage equal to $0 if revenue is $5000, $2000 if revenue is $7000, and $8000 if revenue is $13,000.

Question

Quizplus · Accepted Answer

Under this payment scheme, workers would receive $8000 if they exert high effort and good luck occurs, which is greater than the $7000 they would receive if they exerted low effort and good luck occurs. Similarly, workers would receive $2000 if they exert high effort and bad luck occurs, which is greater than the $0 they would receive if they exerted low effort and bad luck occurs. Therefore, workers would have an incentive to exert high effort under this payment scheme.

Scenario 17.5 Consider the Following Information