MGT100 Problem Set 5: Sales & TA Efforts
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reiana.awadMGT100 Problem Set 5: Sales & TA Efforts
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Powered by AIIf the salesperson works hard, her welfare is 15 (wage) - 10 (effort cost) = 5 . If she does not work, she has a 50% chance of earning 15, providing an expected welfare of 7.5 - 0 (effort cost) = 7.5 . Therefore, she will choose not to work since it yields higher welfare.
Incentive powers b1 and b2 must be balanced to stimulate optimal effort allocation due to their complementary nature. Increasing b2 may reduce necessary effort for increasing attendance (e1) and vice versa. The relationship suggests a strategic complementary design to maximize joint outcomes .
The efforts are complements as indicated by the cost function, meaning increasing one effort can impact the marginal cost of the other. This is critical for setting incentives such that increasing bonus b2 for lecture reviews could indirectly incentivize attendance through cost reduction in effort e1, necessitating careful balance .
Fixed salaries provide income security, reducing employee inclination for risk-taking linked to effort decision. Conversely, performance-based incentives align effort directly with outcome rewards, which can stimulate higher effort if effort leads directly to higher pay, though it might also lead to minimal efforts if risk or outcome uncertainty is high .
Altering one effort, such as increasing e1, affects the marginal cost of the interdependent effort e2. The optimal incentive strategy should consider these interdependencies by aligning bonuses to prioritize tasks having complementary effects, thereby optimizing total effort without disproportionate cost escalation .
Increasing incentive on effort e2 means that more resources could be allocated to reviewing rather than attendance, possibly decreasing e1 due to its marginal cost increase in tandem with e2. This showcases a need for holistic reward strategies balancing effort economics to prevent diminishing e1 productivity .
With the high-powered scheme, the manager’s payoff is 40 (utility of successful sale) - 15 (wage) = 25 if the sale is successful. With the low-powered scheme, payoff is 40 - 5 = 35 irrespective of the sale success . Low-powered scheme guarantees a higher payoff as it avoids the risk of zero income from unsuccessful sales.
A fixed salary scheme outperforms because it eliminates the moral hazard of non-observable effort, ensuring the salesperson guarantees earnings regardless of sales outcomes, which prevents risk aversion impacts that might reduce effort .
Increasing effort e1 initially increases marginal cost of e2 due to complementarity. However, using a creative method like singing could mitigate cost increase by fostering a more engaging environment, ultimately linking the elevated creative effort to improved efficiencies across both activities .
The professor should aim for a high-powered incentive for one effort, depending on which task generates more impact per unit effort. By balancing bonuses b1 and b2, the TA is encouraged to focus optimally on both attendance and reviews according to the value of their impact on overall TA effectiveness .