Hilary sells bottled water at a small stand by the beach. On the last day of summer vacation, many people are at the beach, and Hilary realizes that she can make a lot more money that day if she hires someone to walk the beach selling water. She finds a college student named Edison and makes him the following offer: they will each sell water all day and split their profits (income minus the cost of water) equally at the end of the day. Hilary knows that if they both work hard, Edison will earn $110 at the beach and Hilary will earn $240 at her booth, so they will each take home half of their total earnings: If Edison shirks, he will generate only $60 in profits. Hilary does not know that Edison estimates her personal cost (or disutility) of working hard instead of shirking at $30. Once out of Hilary's sight, Edison faces a dilemma: work hard (try hard) or shirk (try little).

In terms of Edison's total utility, it is worse for him to ____ (work hard or shirk). Considering the loss of utility that hard work causes to Edison, Hilary and Edison together ___ (are or are not) better off if Edison shirks rather than works hard.

Hilary knows that Edison will shirk if he is not supervised. She considers hiring her good friend Carrie to keep an eye on Edison. The most Hilary should be willing to pay Carrie to supervise Edison, assuming the supervision is enough to encourage Edison to work hard, is ____ (55, 30, 25, or 20) .

It turns out that Hilary's friend Carrue is not available that day, so Hilary can't find a trustworthy person to keep an eye on Edison. Discuss the  arrangements that will ensure that Edison works hard without making Hilary worse off than she is when Edison shirks?

Answer rating: 100% (QA)

In terms of Edisons total utility it is worse for him to shirk rather than work hard When Edison shi... View the full answer