A Statistician Writes a Module for a Computer Software Package,which

question 169

Essay

A statistician writes a module for a computer software package,which is upgraded every two years.The statistician's cost data are
Fixed one-time programming costs: $20,000
Annual support costs: $4,000
Opportunity cost of capital for the statistician: 12%
a.If the software company pays $7,000/year to use the software,what is the annual economic profit to the statistician? (HINT: compute the opportunity cost of the investment in human capital).
b.Are the setup costs "sunk," i.e.,is the statistician vulnerable to post-investment hold up? If the software company re-negotiated with the statistician,after she invested in his human capital,how much money could they save?
c.if the statistician is smart,she will look ahead and see the potential of post-investment hold up,and refuse the contract.Should the company offer the statistician $24,000 for the first year?

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Definitions:

Z Test

A statistical test used to determine if there is a significant difference between a sample mean and a population mean, assuming data is normally distributed.

Standard Error

Standard error measures the precision of a sample mean estimate of a population mean, indicating how much the sample mean is expected to fluctuate from the true population mean.

Population Average

The mean value of a given characteristic within an entire population.

Sample Mean

The average of all observations in a sample, calculated by summing the values and dividing by the sample size.