economicsYou own a company that produces chairs, and you are thinking about hiring one more employee. Each chair produced
gives you revenue of $10. There are two potential employees,
Fred Ast and Sylvia Low. Fred is a fast worker who produces
ten chairs per day, creating revenue for you of$100. Fred
knows that he is fast and so will work for you only if you pay
him more than $80 per day. Sylvia is a slow worker who produces only five chairs per day, creating revenue for you of$50.
Sylvia knows that she is slow and so will work for you if you
pay her more than $40 per day. Although Sylvia knows she is
slow and Fred knows he is fast, you do not know who is fast
and who is slow. So this is a situation of adverse selection.
a. Since you do not know which type of worker you will get, you
think about what the expected value of your revenue will be if
you hire one of the two. What is that expected value?
b. Suppose you offered to pay a daily wage equal to the expected revenue you calculated in part a. Whom would you
be able to hire: Fred, or Sylvia, or both, or neither?
c. If you knew whether a worker were fast or slow, which one
would you prefer to hire and why? Can you devise a compensation scheme to guarantee that you employ only the
type of worker you prefer? 5th Edition•ISBN: 9781118898208Jack T. Marchewka346 solutions
15th Edition•ISBN: 9781337520164John David Jackson, Patricia Meglich, Robert Mathis, Sean Valentine249 solutions
12th Edition•ISBN: 9780134165325Barry Render, Chuck Munson, Jay Heizer1,698 solutions
10th Edition•ISBN: 9780134700724Elliot Aronson, Robin M. Akert, Samuel R. Sommers, Timothy D. Wilson525 solutions
