Reference no: EM132735024
Suppose that the manager is instead offered a $55,000 bonus if operating costs are low. High effort, with an effort cost of $20,000, guarantees that operating costs will be low and that the bonus is received. Medium effort, with an effort cost of $10,000, has an 80% chance of yielding low operating costs and therefore an 80% chance that the bonus is received. Low effort, with an effort cost of $0, has no chance of yielding low operating costs and therefore no chance that the bonus is received.
Problem 1: What is the manager's gain (bonus minus effort cost) from high effort?
Problem 2: What is the manager's expected gain (expected bonus minus effort cost) from medium effort if offered a $55,000 bonus for low operating costs?
Problem 3: What effort level does the manager choose if offered a $55,000 bonus?
a. High effort
b. Medium effort
Problem 4: What are the agency's costs, inclusive of any expected bonus payments, if it offers a $55,000 bonus for low operational costs?
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