1. Suppose a manager hires a technician to operate the machine for $5000 per month. The firms monthly revenue depends on only two factors: (1) luck and (2) effort exerted by the technician. The probability of having good luck and that of having bad luck are both 0.5. The technician can choose to exert high effort or low effort, depending on which option maximizes his monthly income. Assume that low effort does not cost the technician while high effort costs him $1000. Below is the firms payoff table:

	Good luck (50% chance)	Bad luck (50% chance)
Low effort	24,000	12,000
High effort	40,000	24,000

1. If the technician is paid with a fixed amount of $5000 per month, which level of effort would he choose? Provide your reasoning.
2. What is the corresponding expected revenue for the firm?
3. If the manager tries to improve the firms expected revenue by offering a pay for performance scheme, why do you think this may or may not work to exert high effort from the technician?
4. If the pay for performance scheme is listed as the following:

(1) If the revenue is below or equal to 24,000, then the technician receives $5000.

(2) If the revenue is larger than 24,000, then the technician receives $5000 plus a bonus of X dollars.

If the bonus is 3000 dollars, would it encourage the technician to put in high effort? Make sure you support your answer with numerical values.

5. Continue the pay for performance scheme. What is the minimum amount of bonus so that the technician is willing to exert high effort?