The firm for which you work estimates its short run revenue with R = 10e – e2 where e is your work effort and R is the firm’s revenue. You choose your work effort on the short term basis to maximize your wage, w, net of your effort, e. Or, you wish to make w – e as large as is possible. Given the three compensation options listed below in parts a, b, and c, tell me which you prefer as the firm’s employee (knowing you want to maximize w – e). Also, tell me which the firm prefers, knowing they wish to maximize profit, you know, R – w. And lastly, explain why these different compensation packages generate different outcomes for you and your employer and why your work effort, e, is different in each.
a. w = 2 for all e > 1; otherwise w = 0
b. w = R/2
c. w = R – 12.5