Reference no: EM132201152

Question: An aluminum company employs an Executive that experiences a 67% probability of successfully generating $15 million in revenue if she works hard She only generates $1 million in revenue for his company with a probability of 33% if she works hard and faces difficulty generating enough sales.

Alternatively, if the Executive does not work hard he only has a 33% probability of successfully generating $10 million in revenue. He experiences a 67% of nothing if she does not work hard. This Executive incurs costs of 300,000 dollars if he works hard and costs of 150,000 if he does not work hard. While he knows if he is working hard, his company cannot determine whether he is working hard when he is successful or when he fails.

1a) What is the equation that depicts the combination of payments required to cover the salary the EXECUTIVE could receive at the market rate and the cost borne if he works hard? Let WSand WF respectively represent the wage payments to the EXECUTIVE if he succeeds or is he fails?

1b) What is the equation that depicts the combination of payments required to cover the salary the EXECUTIVE could receive at the market rate and the cost borne if she does not work hard?

1c) What is the equation that depicts the combination of payments guaranteeing that the EXECUTIVE will receive more from working hard than from shirking?

1d) Use the equation(s) from above to determine the separate wages that the company should pay to offset the EXECUTIVE's costs of working hard and to guarantee that he will receive more from working hard than from shirking? (Note that these wages are separate payments and should represent the minimum payments needed to satisfy the conditions presented in this problem)

1e) Does this expected profit that was derived from adopting the differential pay scheme exceeds the expected profit driven from paying the same salary? (Please explain and show your work)