PS5.2.5 2-part questionWhich compensation package is most expensive?A. Compensate package 3B. Compensation package 1C. The answer cannot be determined from given informationD. Compensation package 2Which compensation package is least expensive? A. Compensation package 2B. Compensation package 1C. The answer cannot be determined from given information D. Compensation package 3

1 point possible (graded) Facebook's board of directors is considering changing Mark Zuckerberg's compensation package (Mark Zuckerberg is the CEO of Facebook). They have decided on three potential compensation packages. In compensation package 1, Zuckerberg would be paid a flat salary of $100, but he would be fired if Facebook lost money (resulting in payoff of $0). In compensation package 2, Zuckerberg would be given 1 share of Facebook stock. He would never be fired for any reason. In compensation package 3, Zuckerberg would be given stock options to buy 1 share of Facebook at the current price (which is $100). Right now, Facebook has three investment opportunities. Opportunity A is to hire more talented programmers. This will increase the value of Facebook's stock to $102 with certainty. Opportunity B is to start a secret effort to create a search competitor to Google. This opportunity has a 90% probability of reducing the value of one share of Facebook stock to $0 and a 10% probability of increasing the value of a share of Facebook's stock to $1000. Finally, Opportunity C of entering the smartphone market has a 50% chance of decreasing the value of Facebook's stock to $90 and a 50% chance of increasing the value of a share of Facebook's stock to $200. Suppose that Mark Zuckerberg maximizes the expected value of his compensation and that Facebook shareholders want to maximize the expected value of share's of Facebook stock. (The expected value of a random variable is the average outcome. When there are two potential outcomes y1 and y2 with probabilities p1 and (1 - p1 ), the expected value of y is E [y] = piyi + (1 - P1) y2.)