Fred wants to hire Barney to manage his retail store. Barney can apply a high level...

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Fred wants to hire Barney to manage his retail store. Barney can apply a high level of effort (at a cost to him of $30), a medium level of effort (at at cost to him of $10), or a low level of effort (at a cost to him of $0). Fred's profits depend not only of the level of Barney's effort but also on the state of consumer demand. Fred believes that demand will be high with probablity 50 percent (and therefore demand will be low with probabiltiy 50 percent). Fred has determined the following possible profit levels will occur depending on Barney's effort and the state of consumer demand: a. effort b. low medium high Demand: low 20 40 80 Fred is considering two possible labor contracts for Barney: 1) a fixed fee contract where Barney receives a wage of $10, and 2) a profit sharing contract where Barney recieves 50 percent of the store's profit but no wage. Both Fred and Barney are risk-neutral. high 40 80 100 What will happen in terms of Barney's effort and expected profits if Fred uses a fixed-fee contract? What will expected profits be? What happens in terms of Barney's effort and expected profits if Fred uses a profit sharing contract? What will expected profits be? Fred wants to hire Barney to manage his retail store. Barney can apply a high level of effort (at a cost to him of $30), a medium level of effort (at at cost to him of $10), or a low level of effort (at a cost to him of $0). Fred's profits depend not only of the level of Barney's effort but also on the state of consumer demand. Fred believes that demand will be high with probablity 50 percent (and therefore demand will be low with probabiltiy 50 percent). Fred has determined the following possible profit levels will occur depending on Barney's effort and the state of consumer demand: a. effort b. low medium high Demand: low 20 40 80 Fred is considering two possible labor contracts for Barney: 1) a fixed fee contract where Barney receives a wage of $10, and 2) a profit sharing contract where Barney recieves 50 percent of the store's profit but no wage. Both Fred and Barney are risk-neutral. high 40 80 100 What will happen in terms of Barney's effort and expected profits if Fred uses a fixed-fee contract? What will expected profits be? What happens in terms of Barney's effort and expected profits if Fred uses a profit sharing contract? What will expected profits be?

Answer rating: 100% (QA)

A If fixed contract is given then certainly barney has no option but to keep his ... View the full answer