The owners of a firm know that the firms's profits will depend upon two parameters: (i) how hard the managers work (maximum and minimum), and (ii) the state of the economy (favorable and unfavorable). The profits under various situations are represented by the matrix below.

Q5 (5 marks). The owners of a firm know that the firm's profits will depend upon two parameters: (i) how hard the managers work (maximum or minimum), and (ii) the state of the economy (favorable or unfavorable). The profits under various situations are represented by the matrix below. Favorable economy Unfavorable economy Maximum effort $700,000 $400,000 Minimum effort $400,000 $200,000 The firm considers there to be an equal probability of either state of the economy. The manager considers the cost of effort to be C = 55,000x, where x = 1 for maximum effort and x = 0 for minimum effort. For each of the pay schemes below, evaluate the incentive of the manager's effort and income, and the firm's expected profit. a (1 mark). A flat salary of $30,000 that is not tied to the firm's performance b (2 marks). In addition to the flat salary of $30,000, the manager gets a bonus of 0 if profit is below or equal to $400,000 and a bonus of $120,000 if profit is above $400,000. c (2 marks). In addition to the flat salary of $30,000, the manager gets a bonus determined by the formula: B = 0.2 x (profit - 300,000)