You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $65,000 0.25 $82,000 0.25 $99,000 0.25 $116,000 0.25 The expected value of hiring one employee is . Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. The expected value of an employee who would apply for the position, at this salary, is . Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is

You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $65,000 0.25 $82,000 0.25 $99,000 0.25 $116,000 0.25 The expected value of hiring one employee is . Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. The expected value of an employee who would apply for the position, at this salary, is . Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 19.6IP

See similar textbooks

Employee Value	Probability
$65,000	0.25
$82,000	0.25
$99,000	0.25
$116,000	0.25

Similar questions

Sophie is offered a performance based wage that will either be equal to $4,200 or to $3,600, each with a probability of 50%. Sophie says that getting $3,900 for certain would be as good as being offered that random wage. Which, of the following sentences, is true? options: Sophie is risk averse and her risk premium is zero. Sophie is risk neutral and her risk premium is zero. Sophie is risk averse and her risk premium is $300. Sophie is risk neutral and her risk premium is $300.
Suppose a company is hiring graduates from Harvard and Yale and they want to hire people with very high predicted productivity. All they use to predict productivity is where they went to school and their GPA. There is no difference in average true ability between students at Harvard and Yale. However, while Yale GPAs are excellent predictors of performance at this company, Harvard GPAs are not. The company hires very few graduates and the cutoff for expected productivity is well above average. What will be true about the GPA cutoffs for the two schools? A. The cutoff for Harvard will be higher.B. The cutoff for Yale will be higher.C. The cutoffs will be the same.D. There is not enough information to answer this question.
Answer all questions. Imagine you are a person with a chronic disease. If the disease flares up, you will have to take substantial leave from work. The probability of the flare-up is 0.2 (or 20%). If you do not need to take leave from work, your income is $6400. If you take leave from work, your income is $1600. What is the expected value of your income? Expected utility E [= (U(1)] = pU (IS) + (1-p) U (IH) 1600 x 0.2 + 0.8 x 6400 = 5540 Assume that your utility function . What is the expected utility of your income? 0.8 √ 6400 + 0.2 √1600 = 72 utils Suppose a company is offering insurance where your premium is $500 and your payout is $2000. What is your expected utility from taking on this insurance? (Hint: you need to calculate your adjusted earnings in both states)
Suppose your utility function for income takes the form U(I) = square root of I (i.e. square root of Income), where I represents thousands of euros. You are considering a self-employment opportunity that may pay €25,000 or €64,000 per year with probability of 0.75 for an outcome of €25,000 and a probability of 0.25 for an outcome of €64,000. Your current salary is €49,000 per year. Which of the following statements is correct? A. You should move jobs because the expected value of the self employment position is higher than your current salary. B. You should move jobs because the expected utility of the self employment position is higher than your current salary. C. You should not move jobs because the expected value of the self employment position is lower than your current salary. D. You should not move jobs because the expected utility of the self employment position is lower than your current salary. Please show all workings.
As an employer, suppose you find it costly to monitor employee effort 100 percent of the time. What compensation options, in terms of the basis of pay, are available to ensure that you get appropriate levels of employee effort? What factors would you consider in choosing among these options?
Adam is offered a performance based wage that will be equal to $4.200 with probability 1/3 or equal to $3,600, with probability 2/3. Adam says that getting $3,500 for certain would be as good as being offered that random wage. Which, of the following sentences, is true? The risk premium he associates with this wage offer is $100. The risk premium he associates with this wage offer is $300. None of the other answers are correct. OThe risk premium he associates with this wage offer is $700. The risk premium he associates with this wage offer is $400.
An employer faces two types of employees. Regular workers at 90% of the population and generate $75,000 in productivity. Exceptional workers are 10% of the population and generate $100,000 in productivity. Employees know their types and reject salaries below their productivity. If employer offers a salary equal to the average productivity in the population, what will be the employer’s per-employee profit? How can this be fixed?
Paul has a utility function of U =[ i to the power 1/2] with income measured in thousands. He will get a job that either pays 25 thousand a year or 64 thousand a year. What is his expected utility, expected payoff, the utility of his expected payoff, and her risk premium? Additionally, plot Paul's utility and income. Show and label his utility curve, his expected utility, and risk premium.
Suppose that Mira has a utility function given by U=2I+10√I. She is considering two job opportunities. The first job pays a salary of $40,000 for sure. The second job pays a base salary of $20,000 but offers the possibility of a $40,000 bonus on top of your base salary. She believes that there is a probability of p=0.50 that she will earn the bonus. What is the expected salary of the second job? Which offer gives Mira a higher expected utility? Based on this information, is Mira risk adverse, risk neutral, or risk-loving?
You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them: Employee Value Probability $50,000 0.25 $60,000 0.25 $70,000 0.25 $80,000 0.25 What is the expected value of five employees you hire?
The small family company that you manage has invested $35,000 in developing a new product, but the development is not quite finished. At a recent meeting, your family company management team predicts that the introduction of competing products has reduced the expected sales of your new product to $30,000. If your company receives zero profit for an unfinished product, and if it would cost $10,000 to finish development and make the product, you go ahead and do so. The most your family company should spend to complete development is O should; $30,000 O should; $20,000 O should; $10,000 O should not; $0
Answer the following sub-questions using economic theory, the principal agent theory and empirical evidence. Most UK and American CEOs are paid significantly more than the average employee of their firms. Does this fact suggest that CEOs are overpaid? French and German CEOs earn considerably less than US CEOs, does this suggest that US CEOs are overpaid? The firm’s stock market price is uncorrelated with the FTSE100 index. In economic terms, does it make sense to pay the firm’s CEO based on the FTSE100 index? Explain. Taking into account the article by Bebchuk et al “The Wages of Failure”, discuss the advantages and disadvantages of incentive pay and the problems of incentive pay in the case of Bear Stearns and Lehman Brothers. Also discuss reforming incentive pay to deal with the problems unearthed at Bear Stearns and Lehman Brothers