QUESTION TWO Your company currentiy produces and sells software for property and casualty insurance companies. You are planning to expand the product and sell the expanded product to life insurance companies. You are currently negotiating a deal to hire Ken Lester to market this product to iife insurance companies since Ken has considerable experience selling software to life insurance companies as he works for another software rm that sells to life insurance companies. Ken is paid $150,000 in his current job. The following facts are also important: - The new product will generate revenues of $500,000 per year if rival software rms have a comparable product in the pipeline and $800,000 per year if rival software rms do not have a comparable product in the pipeline. Ken knows whether rivals have a comparable product in the pipeline or not but you don't. New Product Revenues Rival Firm Product $300 000 $500 000 m - The new product annual production costs are $300,000 per year plus Ken's salary. Thus the new product is profitabie after paying the annual production costs and Ken's reservation salary of $150,000 for both revenue outcomes. Your HR staff has come up with a proposal to pay Ken a base salary of $40,000 plus 20% of the sales that the product generates. Explain to your HP. staff why offering Ken an alternative proposal, $110,000 base salary and 10% of sales revenues, is potentially a better idea. Hint: Risk and risk aversion are not relevant for this question. There is no risk to Ken because he knows which outcome will occur