Question

You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows

If Ron is lazy, he will surf the Internet all day, and he views this as a zero-cost opportunity. However, Ron views working hard as a “personal cost” valued at $2000. What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any “personal cost.”

Short answer

$25\%$of the profit should be offered to Ron.

Step-by-step solution

Content Introduction

We will utilize the way that the normal worth of any decision is a likelihood weighted normal, the amount of every conceivable result duplicated by the likelihood of the decision happening.

Content Explanation

The expected profit is:

If Lazy then,

$\$20,000\times 0.7+\$40,000\times 0.3=\$26,000$

if hard worker then,

$\$20,000\times 0.3+\$40,000\times 0.7=\$34,000$

Let us suppose that R portion of profit is offered to Ron,

if lazy work is there, then,

role="math" localid="1646996071472" $(\$20,000\times R)0.7+\$(40,000\times R)0.3$

if hard worker then,

role="math" localid="1646996082592" $(\$20,000\times R)0.3+(\$40,000\times R)0.7$

And we want Ron to work hard, then it will be

$(\$20,000\times R)0.7+(\$40,000\times R)\times 0.3\le (\$20,000\times R)0.3+(\$40,000\times R)0.7-\$2000$

The result is$25\%$