Suppose a firm runs a tournament compensation scheme for two workers where each worker gets base pay a and the worker who produces more output gets a prize S . Output for each worker i is Q i =dE i + i Suppose 2 1 = is uniformly distributed with mean zero and takes a range of values given by R=2 . The workers both have outside options of U alt =30 and utility functions U i =Y i E 2 /2 . If d=10 , what are the profit-maximizing levels of a and S for the firm? Will the firm choose to offer this compensation scheme to the two workers and produce?

Answer rating: 100% (QA)

To find the profitmaximizing levels of a and S for the firm we need to consider the expected profit ... View the full answer