White Smile Inc. has two plants at which it produces electronic toothbrushes. Fa

Question

White Smile Inc. has two plants at which it produces electronic toothbrushes. Factory workers at each plant have the same characteristics (e.g., skills, alternative employment opportunities, level of income, risk aversion, etc.). The quality of a toothbrush produced is easy to supervise but the effort exerted by a worker is not. Thus, White Smile Inc. pays its factory workers according to a piece-rate contract. More precisely, each worker at plant 1 is paid income I = a1 + b1 X, where a1 is the base salary andb1 a piece rate ($ per unit produced) and X is the number of units produced by a worker. Similarly, each worker at plant 2 is paid income I = a2 + b2 X. Statistical data shows that the probability that the machines used by each worker in the production process break down -due to factors beyond the worker's control- is higher at plant 1 than at plant 2. Based on this information, a properly designed piece-rate contract for workers at these plants should exhibit Answer a1 < a2 and b1 > b2 a1 > a2 and b1 < b2 a1 < a2 and b1 < b2 a1 > a2 and b1 > b2 White Smile Inc. has two plants at which it produces electronic toothbrushes. Factory workers at each plant have the same characteristics (e.g., skills, alternative employment opportunities, level of income, risk aversion, etc.). The quality of a toothbrush produced is easy to supervise but the effort exerted by a worker is not. Thus, White Smile Inc. pays its factory workers according to a piece-rate contract. More precisely, each worker at plant 1 is paid income I = a1 + b1 X, where a1 is the base salary andb1 a piece rate ($ per unit produced) and X is the number of units produced by a worker. Similarly, each worker at plant 2 is paid income I = a2 + b2 X. Statistical data shows that the probability that the machines used by each worker in the production process break down -due to factors beyond the worker's control- is higher at plant 1 than at plant 2. Based on this information, a properly designed piece-rate contract for workers at these plants should exhibit a1 < a2 and b1 > b2 a1 > a2 and b1 < b2 a1 < a2 and b1 < b2 a1 > a2 and b1 > b2 a1 < a2 and b1 > b2 a1 > a2 and b1 < b2 a1 < a2 and b1 < b2 a1 > a2 and b1 > b2

Explanation / Answer

a1>a2 and b1<b2. The base price should offset the loss of productivity of workers due to machine breakdown in factory 1

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