What is the total expected cost if manager exerts medium

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Reference no: EM132735019

An agency's manager can put high, medium, or low effort into cost-minimization. High effort will limit the agency's operating costs to $100,000. However, high effort costs the manager the equivalent of $20,000. Low effort will increase the agency's operating costs up to $200,000. However, low effort costs the manager nothing. Medium effort leaves the agency's operating cost uncertain. There is an 80% chance that the manager will be "lucky" and agency costs will only be $100,000. But there is a 20% chance that the manager will be "unlucky" and agency costs will rise to $200,000. Medium effort costs the manager the equivalent of $10,000.

Problem 1.) What is the total cost (the sum of the agency's operating cost and the manager's effort cost) if the manager exerts high effort?

Problem 2.) What is the total cost (the sum of the agency's operating cost and the manager's effort cost) if the manager exerts low effort?

Problem 3.) What is the total expected cost (the sum of the agency's expected operating cost and the manager's effort cost) if the manager exerts medium effort?

Problem 4.) What is the economically efficient effort level?

a. High effort
b. Low effort
c. Medium effort

Reference no: EM132735019

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