Which effort level does anika choose

Reference no: EM133380773

Question: Anika is hired by the owner of a kitchen supply store to manage the store. Anika and the owner are both risk-neutral. The probability of weak demand is 0.2, and the probability of strong demand is 0.8. Each cell in the following table shows the store's profit from a specific combination of demand and Anika's managerial effort. Anika's cost of effort is not subtracted from these profits. This cost is 2 for low effort, 10 for medium, and 32 for high.

Weak Demand	Strong Demand
Low Effort	40	60
Medium Effort	60	100
High Effort	100	140

Add a column showing Anika's cost of effort and columns for the expected payoff to Anika and the owner.
Fill in the expected payoffs to both parties if Anika is compensated with a profit-sharing contract providing her with 50% of the profits (and the owner gets the other 50%). Which effort level does Anika choose?
Suppose Anika's contract provides her with a base salary of 30 and 100% of any profits exceeding 100. Which effort level does she choose?
Which of the two contracts in parts a. and b. would Anika prefer? Which would the owner prefer?

Reference no: EM133380773

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