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Question
Scenario 17.5Consider 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
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
Answer
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