Question You wish to hire Tim to manage your Gold Coast ramen store. The profits from the store depend partially on how hard Tim works, as follows: Profit Probabilities Profit = $10,000 Profit = $20,000 Lazy 60% 40% Hard worker 40% 60% If Tim is lazy, he will close the store and surf the beach all day, and he views this as a zero cost opportunity. However, Tim views working hard as a “personal cost" valued at $800. Assume that Tim cares only about his expected payment less any “personal cost.” (a) (4 marks) What is your expected profit when Tim is lazy? What is your expected profit when Tim works hard? (b) (5 marks) One method to incentivize Tim to work hard is to offer him a percentage of your profit. What is the minimum percentage of profit should you offer Tim if you want him to work hard? (c) (6 marks) If you ask Tim to have an interview with you before hiring him, which problem of asymmetric information are you trying to solve? If you are satisfied and decide to hire Tim, is that the end of the information asymmetry?
AXT7YT The Asker · Finance
Transcribed Image Text: You wish to hire Tim to manage your Gold Coast ramen store. The profits from the store depend partially on how hard Tim works, as follows: Profit Probabilities Profit = $10,000 Profit = $20,000 Lazy 60% 40% Hard worker 40% 60% If Tim is lazy, he will close the store and surf the beach all day, and he views this as a zero cost opportunity. However, Tim views working hard as a “personal cost" valued at $800. Assume that Tim cares only about his expected payment less any “personal cost.” (a) (4 marks) What is your expected profit when Tim is lazy? What is your expected profit when Tim works hard? (b) (5 marks) One method to incentivize Tim to work hard is to offer him a percentage of your profit. What is the minimum percentage of profit should you offer Tim if you want him to work hard? (c) (6 marks) If you ask Tim to have an interview with you before hiring him, which problem of asymmetric information are you trying to solve? If you are satisfied and decide to hire Tim, is that the end of the information asymmetry?
More Transcribed Image Text: You wish to hire Tim to manage your Gold Coast ramen store. The profits from the store depend partially on how hard Tim works, as follows: Profit Probabilities Profit = $10,000 Profit = $20,000 Lazy 60% 40% Hard worker 40% 60% If Tim is lazy, he will close the store and surf the beach all day, and he views this as a zero cost opportunity. However, Tim views working hard as a “personal cost" valued at $800. Assume that Tim cares only about his expected payment less any “personal cost.” (a) (4 marks) What is your expected profit when Tim is lazy? What is your expected profit when Tim works hard? (b) (5 marks) One method to incentivize Tim to work hard is to offer him a percentage of your profit. What is the minimum percentage of profit should you offer Tim if you want him to work hard? (c) (6 marks) If you ask Tim to have an interview with you before hiring him, which problem of asymmetric information are you trying to solve? If you are satisfied and decide to hire Tim, is that the end of the information asymmetry?
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a) Expected profit when Tim is lazy is :0.6^{*} \$ 10,000+0.4 * \$ 20,000=\$ 14,000Expected profit when Tim is working Hard :0.4^{*} \$ 10,000+0.6^{*} 20,000=\$ 16,000b) If Tim is working hard then he is incurring a personal cost of \$ 800, so the %age profit should be such that he is able to cover this cost.and therefore %age profit should be 5 \%c) We are currenlty facing problem of adverse selection after hiring we will have a probelm of moral hazard. ...