Eric has a job at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard or not. If Eric works hard, there is a 75% probability that electronics goods profits will equal $400 a day and a 25% probability that electronics goods profits will equal $100 a day. If Eric shirks, there is a 75% probability that electronics goods profits will equal $100 a day and a 25% probability that electronics goods profits will equal $400 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are $100 a day. Eric 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

The expected profit from working hard is (0.75 * $200) + (0.25 * $50) - $100 = $125. The expected profit from shirking is (0.75 * $50) + (0.25 * $200) = $87.50. Therefore, Eric will shirk because the net gain of $87.50 from shirking is more than the net gain of $62.50 from working hard.

Eric Has a Job at an Electronics Store in a Mall