Ginny sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Ginny realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Eric and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Ginny knows that if they both work hard, Eric will earn $80 on the beach and Ginny will earn $160 at her stand, so they will each take home half of their total revenue: $80+$160 2 = $120. If Eric shirks, he'll generate only $50 in earnings. Ginny does not know that Eric estimates his personal cost (or disutility) of working hard as opposed to shirking at $20. Once out of Ginny's sight, Eric faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Eric's total utility, it is worse for him to Taking into account the loss in utility that working hard brings to Eric, Ginny and Eric together hard. Ginny knows Eric will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Eric. The most Ginny should be willing to pay Carrie to supervise Eric, assuming supervision is sufficient to encourage Eric to work hard, is better off if Eric shirks instead of working. It turns out that Ginny's friend Carrue is unavilable that day, so Ginny cannot find a reliable person to watch Eric. Which of the following arrangements will ensure that Eric works hard without making Ginny any worse off than she is when Eric shirks? O Allow Eric to keep 70% of the revenue from the bottles of water he sells instead of 50% O Allow Eric to keep 62% of the revenue from the bottles of water he sells instead of 50% O Pay Eric $70, regardless of how many bottles of water he sells O Make Eric promise to work hard
Ginny sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Ginny realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Eric and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Ginny knows that if they both work hard, Eric will earn $80 on the beach and Ginny will earn $160 at her stand, so they will each take home half of their total revenue: $80+$160 2 = $120. If Eric shirks, he'll generate only $50 in earnings. Ginny does not know that Eric estimates his personal cost (or disutility) of working hard as opposed to shirking at $20. Once out of Ginny's sight, Eric faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Eric's total utility, it is worse for him to Taking into account the loss in utility that working hard brings to Eric, Ginny and Eric together hard. Ginny knows Eric will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Eric. The most Ginny should be willing to pay Carrie to supervise Eric, assuming supervision is sufficient to encourage Eric to work hard, is better off if Eric shirks instead of working. It turns out that Ginny's friend Carrue is unavilable that day, so Ginny cannot find a reliable person to watch Eric. Which of the following arrangements will ensure that Eric works hard without making Ginny any worse off than she is when Eric shirks? O Allow Eric to keep 70% of the revenue from the bottles of water he sells instead of 50% O Allow Eric to keep 62% of the revenue from the bottles of water he sells instead of 50% O Pay Eric $70, regardless of how many bottles of water he sells O Make Eric promise to work hard
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter5: Investment Decisions: Look Ahead And Reason Back
Section: Chapter Questions
Problem 5.6IP
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Transcribed Image Text:Ginny sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Ginny realizes that
she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Eric
and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the
day. Ginny knows that if they both work hard, Eric will earn $80 on the beach and Ginny will earn $160 at her stand, so they will each take home half
of their total revenue:
$80+$160
2
= $120. If Eric shirks, he'll generate only $50 in earnings. Ginny does not know that Eric estimates his personal cost
(or disutility) of working hard as opposed to shirking at $20.
Once out of Ginny's sight, Eric faces a dilemma: work hard (put in full effort) or shirk (put in low effort).
In terms of Eric's total utility, it is worse for him to
Taking into account the loss in utility that working hard brings to Eric, Ginny and Eric together
hard.
Ginny knows Eric will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Eric. The most Ginny should be willing to pay
Carrie to supervise Eric, assuming supervision is sufficient to encourage Eric to work hard, is
better off if Eric shirks instead of working.
It turns out that Ginny's friend Carrue is unavilable that day, so Ginny cannot find a reliable person to watch Eric. Which of the following arrangements
will ensure that Eric works hard without making Ginny any worse off than she is when Eric shirks?
O Allow Eric to keep 70% of the revenue from the bottles of water he sells instead of 50%
O Allow Eric to keep 62% of the revenue from the bottles of water he sells instead of 50%
O Pay Eric $70, regardless of how many bottles of water he sells
O Make Eric promise to work hard
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