The owner of the Jets is going to offer a contract to a free agent player, Hapoleon. If signed, Hapoleon can give the Jets high effort or low effort. High effort costs Hapoleon $2 million and low effort costs Hapoleon nothing. The Jets’ owner cannot observe Hapoleon’s effort directly. Hapoleon has a guaranteed offer of $10 million from another team, the Sharks. If Hapoleon signs with the Jets, the team can be profitable or not and the Jets’ owner can observe that. If Hapoleon gives high effort, then the probability the Jets are profitable is 80 percent, but if Hapoleon gives low effort, then the probability the Jets are profitable is 40 percent. Hapoleon is the typical risk neutral player and his utility is given by u w() = w . Calculate the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if Hapoleon’s disutility from high effort increases to $3 million. Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead Hapoleon’s disutility from low effort increases to $1 million. Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead the probability of high profits given high effort increases to 90 percent. Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead the probability of high profits given low effort increases to 50 percent. m.Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead the Sharks’ offer increases to $11 million.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The owner of the Jets is going to offer a contract to a free agent player, Hapoleon. If signed, Hapoleon can give the Jets high effort or low effort. High effort costs Hapoleon $2 million and low effort costs Hapoleon nothing. The Jets’ owner cannot observe Hapoleon’s effort directly.

Hapoleon has a guaranteed offer of $10 million from another team, the Sharks. If Hapoleon signs with the Jets, the team can be profitable or not and the Jets’ owner can observe that.

If Hapoleon gives high effort, then the probability the Jets are profitable is 80 percent, but if Hapoleon gives low effort, then the probability the Jets are profitable is 40 percent.

Hapoleon is the typical risk neutral player and his utility is given by u w() = w .

Calculate the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if Hapoleon’s disutility from high effort increases to $3 million.
Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead Hapoleon’s disutility from low effort increases to $1 million.
Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead the probability of high profits given high effort increases to 90 percent.
Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead the probability of high profits given low effort increases to 50 percent.

m.Determine the optimal wage levels, wH and wL , that the Jets’ owner should offer Hapoleon to get him to sign with the Jets and give high effort if instead the Sharks’ offer increases to $11 million.

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