Reference no: EM132999953
Tim, Tom, and Tony Ltd, is a political lobbyist corporation whose owners do not have the required management expertise to run the corporation. The owners want to hire a manager with the required expertise. The continued success of this corporation depends crucially on how hard the new manager works. If the new manager works hard (a1), corporation net income will be $1,000 with probability 0.7 and $400 with probability 0.3. If the new manager shirks (a2), net income will be $1,000 with probability 0.2, and $400 with probability 0.8. In both cases, profits are before new manager compensation. The owners are interviewing Martin Edwards, and find out that he is risk averse, with a utility for compensation equal to the square root of the dollar compensation received. Like most people, however, he is also effort-averse. If he works hard, he suffers a disutility of effort of 4 units of utility. If he shirks, his effort disutility is 1 unit.
-Prepare a payoff table for the above game between the owners and the new manager.
-Tim, Tom, and Tony Ltd offer Martin Evans a one-period contract with a salary of $82 per period plus 20% of net income before manager compensation. Will Martin take (a1) or (a2)? Show your calculations. Use two decimal places.
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