Consider the following scenario faced by a firm. - A probationary contract speci

Question

Consider the following scenario faced by a firm.

- A probationary contract specifies that a worker is paid $2110 per month for the first m months.

-After m months the worker is either fired or gets a raise to $2500 per month for (10-m) months.

-A low productivity worker has a 90% chance of being fired at the end of the probationary period.

-A low productivity worker can earn $2200 per month from an alternative employer.

How many (whole) months must the probationary period last to keep the low productivity workers from applying?

Explanation / Answer

Answer : For the first m whole months must the probationary period last to keep the low productivity workers from applying. Because after m months the low productivity workers has 90% chance to begin fired. Therefore, m is the probationary period which keeps all workers including low workers also from applying.

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