Question

A manufacturing firm employs a CEO that experiences a 3/4 probability of successfully generating $10 million in revenue if she works hard. She only generates $1 million in revenue for her company with a probability of 1/4 if she works hard and loses the case. Alternatively, if this CEO does not work hard she only has a 1/4 probability of successfully generating $10 million in revenue. She experiences a 3/4 probability of only generating $1 million if she does not work hard. This CEO experiences costs of $250,000 if she works hard and costs of $150,000 if she does not. While she knows if she’s working hard, her company can not determine whether she is working hard when she is successful or when she fails.

a.) If the manufacturing company pays this CEO $150,000 above the market rate of $400,000 whether she succeeds or fails, will she have incentive to work hard? Explain.

b.) What is the CEO’s net earnings at this pay level?

c.) What is the company's expected profit for this situation?

Answer 1

ans:

given data:

• Prtobability of success generating= 1/4
• Successfull generating in revenue= 10 millions
• Experiences probability=3/4
• Only generating experiences=$ 1 million
• CEO experiences cost=$250000
• she works hard and cost=$150000
• market rate=$400000

a. here we have to find out the manufacturing company has pays this CEO$ 150000above the market rateof $ 4000000 whather she had succed or not:

• If the CEO buckles down she should encounter 2,50,000$ of cost and If she doesn't she will experince 1,50,000$ of cost.
• Presently the Profit of the frim doesn't have any connection with the CEO's motivators part and consequently
• the CEO would dependably decide not to buckle down as the cost related with working not hard is only 1,50,000$ which is under 2,50,000$ cost on the off chance that she buckles down.
• So except if some prportion of company's benefit is to be given to the CEO as motivating force/pay
• the CEO will never buckle down as she generally needs to expand the compensation.

b) here we have to find out the CEO's net earning:

• we already know the formula of CEO's net earning= Salary - Cost
• Furthermore, in the above condition expressed in the event that a the net winning of the CEO.
• Net earing of CEO is =400,000+150,000-150,000

   Net earning = 400,000$

c) here we have top findout the company's expected profit:

• Prtobability of success generating= 1/4
• Successfull generating in revenue= 10 millions
• Experiences probability=3/4
• Only generating experiences=$ 1 million
• As the CEO wouldn't buckle down the Firm's exp benefit is

   Expected profit =(probability of generating)( generating in revenue)+( probability of experience)(generating experiences​

• Expected profit= 1/4*10 + 3/4*1

  Expected profit = 3.25Mn$

• As the benefit when president doen't buckles dwn has 1/4 th of prob of hitting 10 and 3/fourth of prob of hitting 1