II - A Managerial problem II

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 0.2, and the probability of strong demand is 0.8. Each cell in the following table shows the store's profit from a specific combination of demand and Anika's managerial effort. Anika's cost of effort is not subtracted from these profits. This 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
High Effort	100	140

1. Add a column showing Anika's cost of effort and columns for the expected payoff to Anika and the owner.
2. Fill in the expected payoffs to both parties if Anika 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 Anika choose?
3. Suppose Anika's contract provides her with a base salary of 30 and 100% of any profits exceeding 100. Which effort level does she choose?
4. Which of the two contracts in parts a. and b. would Anika prefer? Which would the owner prefer?