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How can I solve this problem in an excel spreadsheet? Manuela is the manager of an office supply store. The store can have weak demand,
How can I solve this problem in an excel spreadsheet?
Manuela is the manager of an office supply store. The store can have weak demand, with a probability of 0.2, and strong demand, with a probability of 0.8. Moreover, the store's profit will depend on Manuela's managerial effort, as it is shown in the following table. From Manuela's perspective, each effort level comes with a cost. This cost is 2 for low effort, 10 for medium, and 32 for high. Both Manuela and the owner are risk neutral.
Weak Demand | Strong Demand | |
Low Effort | 40 | 60 |
Medium Effort | 60 | 100 |
High Effort | 100 | 140 |
- Fill in the expected payoffs to both parties if Manuela is compensated with a fixed salary of 20. Which effort level does Manuela choose?
- Fill in the expected payoffs to both parties if Manuela is compensated with a profit-sharing contract providing her with 50% of the profits (and the owner gets the other 50%). Which effort level does Manuela choose?
- Now suppose that Manuela's contract provides her with a base salary of 30 and 100% of any profits exceeding 100. Which effort level does she choose?
- Which of the two contracts in parts a., b., and c. would Manuela prefer? Which would the owner prefer?
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