Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 32

Return to problem 15.2. Suppose that Clare can still choose to exert effort, as in the previous problem, probationary period during which it observes workers' productivity and fires them or adjusts their wages according to how the workers perform. What affect would this strategy have on the return to education? Can you think of real world markets in which firms use such strategies? but that she can also choose not to exert effort. If she does not exert effort, she has no effort cost, so her utility is just the wage, w; the shop's return is $400for certain.
a. If shareholders offered to share half of the store's gross profit, what effort would Clare
choose? Would she accept such a contract? What if she were only given a quarter share?
What would be the lowest share that would get her to exert effort?
b. Suppose instead that shareholders decided to offer her a $100 bonus if the store earns$1,000. Show that this would not get her to work hard. What is the minimum bonus that she would need to be paid? What fixed salary would she need to be paid in addition to get hereto accept the contract?