Scenario 5 Bad Luck S5000 $7000 Good Luck $7000 $13000 Low Effort (e-0) High Eff

Question

Scenario 5 Bad Luck S5000 $7000 Good Luck $7000 $13000 Low Effort (e-0) High Effort (e-1) 17. Scenario 5, above, describes the income that can be achieved by workers selling a product by phone. The probabilities of Bad and Good luck with the phone calls are 0.75 and 0.25 respectively. Assume it costs each worker $2000 to exert High Effort, and the cost of Low Effort is $O. In order to get higher net income, the workers will commit Low effort 75% of the time and High effort 25% of the time. Low effort 25% of the time and High effort 75% of the time Low effort. High effort. a. b. c. d.

Explanation / Answer

The expected income is given as:

Low effort = 5000*.75 + 7000*.25 = 5500

High effort = (7000 - 2000) * 0.75 + (13000 - 2000) * .25 = 6500

Since, the expected income with high effort is always more than low effort, d) high effort is committed to get higher net income.

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