Question

For each problem in section B, make sure that each answer has also an indication of what exactly are you computing (theoretical meaning) and how relates to the general framework of P-A Theory. Problem 1 [50 Marks] Consider a street vendor who is meeting clients on behalf of his boss: depending on how hard the street vendor works, no sale (revenues equal to zero), good sale (revenues equal to 100) and excellent sale (revenues equal to 400) are likely according to the following probabilities: Works hard {0 with prob. 0.1; {100 with prob. 0.3; {400 with prob. 0.6; Does not work hard {0 with prob. 0.6; {100 with prob. 0.3; {400 with prob. 0.1; Assume that working hard has a cost of effort of 25 for the street vendor; also assume that the street vendor has another job opportunity, which involves no risk and pays 81 (so that he will never accept a contract that gives him expected utility less than 81). a) Compute the expected profits for the boss if the street vendor puts in a high level of effort; b) Compute the expected profits for the boss if the street vendor puts in a low level of effort; c) Is there any contract that the boss will be happy to sign that could induce the street vendor to put in a low level of effort? d) Suppose the boss proposes to the street vendor "if you make no sale, you pay me 164. If you make a good sale, you pay me 64. If you make an excellent sale, you will be paid 236 pounds". Will the street vendor sign such a contract and which level of effort will he choose?

          For each problem in section B, make sure that each answer has also an indication of what exactly are you computing (theoretical meaning) and how relates to the general framework of P-A Theory.

Problem 1 [50 Marks]

Consider a street vendor who is meeting clients on behalf of his boss: depending on how hard the street vendor works, no sale (revenues equal to zero), good sale (revenues equal to 100) and excellent sale (revenues equal to 400) are likely according to the following probabilities:

Works hard
{0 with prob. 0.1;
{100 with prob. 0.3;
{400 with prob. 0.6;

Does not work hard
{0 with prob. 0.6;
{100 with prob. 0.3;
{400 with prob. 0.1;

Assume that working hard has a cost of effort of 25 for the street vendor; also assume that the street vendor has another job opportunity, which involves no risk and pays 81 (so that he will never accept a contract that gives him expected utility less than 81).

a) Compute the expected profits for the boss if the street vendor puts in a high level of effort;
b) Compute the expected profits for the boss if the street vendor puts in a low level of effort;
c) Is there any contract that the boss will be happy to sign that could induce the street vendor to put in a low level of effort?
d) Suppose the boss proposes to the street vendor "if you make no sale, you pay me 164. If you make a good sale, you pay me 64. If you make an excellent sale, you will be paid 236 pounds". Will the street vendor sign such a contract and which level of effort will he choose?

For each problem in section B, make sure that each answer has also an indication of what exactly are you computing (theoretical meaning) and how relates to the general framework of P-A Theory.

Problem 1 [50 Marks]

Consider a street vendor who is meeting clients on behalf of his boss: depending on how hard the street vendor works, no sale (revenues equal to zero), good sale (revenues equal to 100) and excellent sale (revenues equal to 400) are likely according to the following probabilities:

Works hard
0 with prob. 0.1;
100 with prob. 0.3;
400 with prob. 0.6;

Does not work hard
0 with prob. 0.6;
100 with prob. 0.3;
400 with prob. 0.1;

Assume that working hard has a cost of effort of 25 for the street vendor; also assume that the street vendor has another job opportunity, which involves no risk and pays 81 (so that he will never accept a contract that gives him expected utility less than 81).

a) Compute the expected profits for the boss if the street vendor puts in a high level of effort;
b) Compute the expected profits for the boss if the street vendor puts in a low level of effort;
c) Is there any contract that the boss will be happy to sign that could induce the street vendor to put in a low level of effort?
d) Suppose the boss proposes to the street vendor "if you make no sale, you pay me 164. If you make a good sale, you pay me 64. If you make an excellent sale, you will be paid 236 pounds". Will the street vendor sign such a contract and which level of effort will he choose?

Added by Hugo B.

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