Curtis manages an electronics store in Wichita, Kansas. He considers carrying either cameras from Nikon Americas that come with a U.S. warranty or gray market Nikon cameras from a European supplier, which are the same cameras but their warranties are only good in Europe. The gray market cameras have a lower wholesale price. Curtis earns 10% of the store’s profit (and no wage). If the store loses money, he leaves with nothing. He believes that if he sells the Nikon Americas cameras, the store’s profit will be $ 400,000. The profit on the gray market cameras is more uncertain—will locals be willing to buy a less expensive camera without a warranty? If he goes with the gray market camera, he believes that there’s a 50% chance that the store’s profit will be $ 1,000,000 and a 50% probability that the store will lose $ 300,000. Curtis and the store’s owner are both risk neutral. Which camera does Curtis choose to sell? What choice would the owner prefer (if she were fully informed)? Construct an alternative compensation plan involving a salary such that Curtis will earn as much from selling Nikon Americas cameras and that will dissuade him from selling black market cameras if doing so lowers the owner’s expected earnings.
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