Selected Answer:

	Required compensation
Widgets Sold	Disutility of effort (total, not marginal)
0	$0
1	$40
2	$222
3	$495
4	$860
5	$1'250
6	$1'750
7	$2'388
8	$3'117
9	$3'937
10	$4'849

Suppose that the fixed setup cost is 0, but there is uncontrollable risk with the following characteristics: (a) Coefficient of Absolute Risk Aversion R is 0.1, and (b) Variance²is 0.25.

The optimal incentive intensity is_______in the case without risk (to answer this question, setup a spreadsheet and calculate "total profits", and find the quantity that maximizes total profits)

Answers:

• higher than
• lower than
• the same as