Pam Works at a Jewelry Kiosk in a Mall

question 44

Multiple Choice

Pam works at a jewelry kiosk in a mall. Pam doesn't like to work hard, and it costs her $100 to do so. Pam's employer cannot observe whether Pam works hard. If Pam works hard, there is a 90% probability that jewelry profits will equal $400 a day and a 10% probability that jewelry profits will equal $100 a day. If Pam shirks, there is a 90% probability that jewelry profits will equal $100 a day and a 10% probability that jewelry profits will equal $400 a day. Suppose Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. Pam will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.

• A) shirk; $50; more; $45
• B) shirk; $75; more; $65
• C) work hard; $45; less; $185
• D) work hard; $65; less; $85

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Definitions:

Unit Variable Expenses

Costs that vary directly with the level of production or sales volume, calculated on a per unit basis.

Fixed Expenses

Costs that do not fluctuate with changes in production level or sales volume, such as rent and salaries.

Absorption Costing

A method of costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead in the cost of a product.

Net Operating Income

The total operating profit of a company after all operating expenses, excluding taxes and interest expenses, have been deducted from total revenue.