Question

B3. (22 marks) You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows. Profit Probabilities Profit $20,000 Profit $40,000 70% 30% Lazy 30% 70% Hard worker If Ron is lazy, he will surf the Internet all day, and he views this as a zero cost opportunity. However, Ron views working hard as a "personal cost" valued at $2,000. Assume that Ron cares only about his expected payment less any "personal cost." (a) What is your expected profit when Ron is lazy? What is your expected profit when Ron works hard? Specify two numbers. (8 marks) (b) Suppose you offer R portion of the profits. Write down an equation that represents the expected value of Ron's profits when Ron is lazy, by using R (4 marks) Write down an equation that represents the expected value of Ron's profits when (c) Ron works hard, by using R. (4 marks) (d) What fixed percentage of the profits (at least) should you offer Ron if you want Ron to work hard? (6 marks)

Answer 1

Paga No. 20 Dato Predid p-syoos 3o7 Paslitz $20,00o 701 La zy Hard uorke 301 /.ot fxpcctdl Pashid uehen Ren is + 0.3x4 o,000 ia Lazy Z 36,000 when Ron £xpeckd Poht when Ren usrks hadEO 3x 20,0o 0 -34,000 lazy & postien of tht pafi ta whon Rea eauation 26, a00 R phida tahen Ren's is hardl as easuah en= 34,00o R-2000 Kpartion he usr ken (C Fixed pencantage ef pfit 80 Ron to Work uord 2600o R 34000 R-2 000 8000 R S 000 1 R- O.25