Skyline Inc. is a risk-neutral profit maximizing enterprise. For each sold apartment, they receive a profit...

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Skyline Inc. is a risk-neutral profit maximizing enterprise. For each sold apartment, they receive a profit of 500. They directly cannot sell any apartment. Their salesperson Jim-who is a risk-averse agent-takes care of the sale. The probability of sale depends on Jim who may laze, try a bit or wor hard. More effort means more disutility for Jim but more probability of sale for Skyline as given in the following table. Effort laze try a bit work hard Disutility 0 1 2 Probability of Sale 0.1 0.3 0.4 Jim's utility is given by Vw - disutility of effort, where w is the monetary compensation received. Jim's efforts are neither observable nor enforceable by Skyline Inc. Skyline is considering the following contracts for Jim: C1: Jim receives a constant pay of 100 in lieu of working hard. C2: Jim receives a base wage of 36 and a bonus of 108 whenever an apartment is sold. C3: Jim receives no base wage and a bonus of 400 whenever an apartment is sold For each contact what will be Jim's effort level and Skyline's profit? Explain. Skyline Inc. is a risk-neutral profit maximizing enterprise. For each sold apartment, they receive a profit of 500. They directly cannot sell any apartment. Their salesperson Jim-who is a risk-averse agent-takes care of the sale. The probability of sale depends on Jim who may laze, try a bit or wor hard. More effort means more disutility for Jim but more probability of sale for Skyline as given in the following table. Effort laze try a bit work hard Disutility 0 1 2 Probability of Sale 0.1 0.3 0.4 Jim's utility is given by Vw - disutility of effort, where w is the monetary compensation received. Jim's efforts are neither observable nor enforceable by Skyline Inc. Skyline is considering the following contracts for Jim: C1: Jim receives a constant pay of 100 in lieu of working hard. C2: Jim receives a base wage of 36 and a bonus of 108 whenever an apartment is sold. C3: Jim receives no base wage and a bonus of 400 whenever an apartment is sold For each contact what will be Jim's effort level and Skyline's profit? Explain.

Answer rating: 100% (QA)

C1 Constant Wage No incentive to C2 Expected profit Effort 0 E... View the full answer