QUESTION 2 4 points Save Answer Consider the following example. A risk-neutral worker can choose high or low effort. The manager cannot observe the worker's action , but the manager can observe the realized revenue for the firm (either $100 or $200). The probability of each revenue depends on the worker's effort: low Low effort: high cost of effort : $0 probability of low revenue ($100) : 75% should probability of high revenue ($200) : 25% should not High effort: 37.50 cost of effort : $15 48.75 probability of low revenue ($100) : 25% 68.75 probability of high revenue ($200) : 75% 73.75 The manager offers to give the worker 25% of revenue. Given this payment scheme, the worker will put in effort. The firm's expected profit is $ 93.75 The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $15 to $13. If it costs 98.75 the firm $20 to implement this program, the firm's expected profit if they implement the program is $ v . The firm implement the program. 118.75 111.25 131.25 QUESTION 3 4 points Saved Consider the following example. A risk-neutral worker can choose high or low effort. The manager cannot observe the worker's action , but the manager can observe the realized revenue for the V low firm (either $100 or $200). The probability of each revenue depends on the worker's effort: Low effort: high cost of effort : $0 should probability of low revenue ($100) : 75% should not probability of high revenue ($200) : 25% 70 High effort: cost of effort : $11 80 probability of low revenue ($100) : 25% 90 probability of high revenue ($200) : 75% 100 The manager offers to give the worker a flat wage of $10 and a bonus of $20 if revenue is high. Given this payment scheme, the worker will put in low v effort. The firm's 110 expected profit is $ 110 120 The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $11 to $9. If it costs 130 the firm $20 to implement this program, the firm's expected profit if they implement the program is $ 130 v . The firm should implement the program. 140 150