Pam has a job at a jewelry kiosk in a mall. Pam doesn't like to work hard, and it costs her $100 to do so. Pam's employer cannot observe whether Pam works hard or not. If Pam works hard, there is a 75% probability that jewelry profits will equal $400 a day and a 25% probability that jewelry profits will equal $100 a day. If Pam shirks, there is a 75% probability that jewelry profits will equal $100 a day and a 25% probability that jewelry profits will equal $400 a day. Suppose Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. Pam will _____ because the net gain of _____ from shirking is _____ than the net gain of _____ from working hard.
A) shirk; $87.50; more; $62.50
B) shirk; $125; more; $118
C) work hard; $50; less; $62.50
D) work hard; $100; less; $250

Question

Quizplus · Accepted Answer

If Pam works hard, the probability of earning $400 is 75% and the probability of earning $100 is 25%. Thus, the expected profit for working hard is:
($400 x 0.75) + ($100 x 0.25) = $325
After subtracting the cost of working hard ($100), Pam's net gain is $225.
If Pam shirks, the probability of earning $100 is 75% and the probability of earning $400 is 25%. Thus, the expected profit for shirking is:
($100 x 0.75) + ($400 x 0.25) = $175
After subtracting the cost of shirking ($0), Pam's net gain is $175.
Therefore, Pam will shirk because the net gain of $175 from shirking is more than the net gain of $225 from working hard. The best choice is (A).

Pam Has a Job at a Jewelry Kiosk in a Mall