Eric Works at an Electronics Store in a Mall

question 62

Multiple Choice

Eric works at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard. If Eric works hard, there is a 90% probability that electronics goods profits will equal $400 a day and a 10% probability that electronics goods profits will equal $100 a day. If Eric shirks, there is a 90% probability that electronics goods profits will equal $100 a day and a 10% probability that electronics goods profits will equal $400 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. Eric 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:

Marginal Subcontracting Cost

The additional cost incurred for each additional unit of production that is subcontracted rather than produced in-house.

Layoff Cost

The expenses associated with reducing an organization's workforce, encompassing severance pay, benefits continuation, and potential legal costs.

Hiring And Training Cost

Expenses associated with recruiting new employees and providing them with the necessary skills and knowledge for their role.

Labor Hours

The total number of hours worked by employees, used as a measure of labor input in the production of goods and services.