Question

1. Understanding how shirking decreases team output

Kate sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Kate realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Hubert and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Kate knows that if they both work hard, Hubert will earn $100 on the beach and Kate will earn $200 at her stand, so they will each take home half of their total revenue: $100+$2002=$150$100+$2002=$150. If Hubert shirks, he'll generate only $60 in earnings. Kate does not know that Hubert estimates his personal cost (or disutility) of working hard as opposed to shirking at $25.

Once out of Kate's sight, Hubert faces a dilemma: work hard (put in full effort) or shirk (put in low effort).

In terms of Hubert's total utility, it is better for him to __________ (Shirk/Work Hard) .

Taking into account the loss in utility that working hard brings to Hubert, Kate and Hubert together_________ (Are/Are Not) better off if Hubert works hard instead of shirking.

Kate knows Hubert will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Hubert. The most Kate should be willing to pay Carrie to supervise Hubert, assuming supervision is sufficient to encourage Hubert to work hard, is _______ ($15,$20,$25,$50)   .

It turns out that Kate's friend Carrue is unavilable that day, so Kate cannot find a reliable person to watch Hubert. Which of the following arrangements will ensure that Hubert works hard without making Kate any worse off than she is when Hubert shirks?

Allow Hubert to keep 71% of the revenue from the bottles of water he sells instead of 50%

Pay Hubert $20, regardless of how many bottles of water he sells

Allow Hubert to keep 56% of the revenue from the bottles of water he sells instead of 50%

Make Hubert promise to work hard

Answer 1

solution-

1) shrink

Benefit of Alex when he works hard = 150 - 25 (estimated cost of hard working) = $ 125

Benefit of Alex when he shrinks = (60 + 200)/2 = 130

2) are not better off

3) $ 20 is the price that Susan willing to pay.

Profit of each when both works hard = 150

Profit of each when Raphael shrinks = 130

4) Allow Alex to keep 56% of the revenue from the bottles of water he sells instead of 50%.

TR = 300

Alex share = 56% of 300 = 168

After excluding his cost of hard work = 168 - 25 = 143 which is greater than the share which he gets after shrink. So, Alex would work hard.