Question
I need solution to the following problem.Kindly do not copy paste from Chegg as the answer is not correct. Solve it if you can otherwise
Anika is hired by the owner of a kitchen supply store to manage the store.Anika and the owner are both risk neutral.The probability of weak demand is 0.2and the probability of strong demand is 0.8.Each cell in the following table shows the stores profit from a specific combination of demand and Anikas managerial effort..Anikas cost of effort is not subtracted from these profits.This effort cost is 2 for low effort, 10 for medium and 32 for high.
Weak demand. Strong demand
Low effort. 40. 60
Medium effort. 60. 100
Low effort 100. 140
Create a spreadsheet containing this information.Add a column showing Anikas cost of effort and also add columns for the expected payoff to Anika and the owner.
A:Fill in the expected payoffs to both parties if Anika is compensated for a profit sharing contract providing her with a 50% profit. And the owner gets the other 50%.Which effort level does Anika choose
B:Now suppose that Anikas contract provides her with a base salary 30 and 100% of any profits exceeding 100.Which effort level does she choose?
C:
Which of the two contracts in part a and b will Anika prefer?Which could the owner prefer?
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