Homework Sourse1 An expert works for you to manage an investment project Th
1. An expert works for you to manage an investment project. The expert has a fixed salary of $50,000 and can choose to hard work or shirk. If the expert works, he can no longer have a part-time during the year which may bring him an additional $10,000. The return of the project at the end of the year is given by:
Chance of getting $100,000 Chance of getting $0
If hard work 4/5 1/5
If shirk 1/5. 4/5
The project is too professional so that you can never know whether the expert shirks or not.
(1) Will the expert hard work based on the payment schedule? What is your expected profit from this project? Will you start this project? Hint: Don\'t forget the salary to the expert.
(2) Now that in addition to the salary you promise to give the expert an extra $15,000 only if the project is succeed. Will the expert hard work now? What is your expected profit from this project? Will you start this project?
(3) Can the new payment schedule work if we change the extra payment in (2) to $10,000?
Solution
(1) No , the expert hard work is not based on the payment schedule.
If hard work, Expected Profit = Total getting - Investment on expert
= (100000*4/5 + 0*1/5 ) - 50000
= ( 80000 - 50000 )
= $30000
If shirks, Expected Profit = Total getting - Investment on expert
= (100000*1/5 + 0*4/5 ) - 50000
= ( 20000 - 50000 )
= - $30000 ( Its a loss)
Therefore,
Expected profit from this project = (30000 - 30000)/2 = 0
No, I will not start this project.
(2)
Yes, expert will do hard work because now he will be earning more than that of part time.
Now, he is doing hard work ,so:
Expected Profit = Total getting - Investment on expert
= (100000*4/5 + 0*1/5 ) - (50000+15000)
= ( 80000 - 65000 )
= $15000
Yes , I will start this project as I am getting profit.
(3)
Now ,this depends on the expert what he feels easy as he is getting same extra amount .
