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Understanding how shirking decreases team output Eileen sells bottled water from a small stand by the beach. On the last day of summer vacation,...

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1. Understanding how shirking decreases team output Eileen sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Eileen realizes
that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named
Clancy and makes him the following offer: They‘ll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Eileen knows that if they both work hard, Clancy will earn $110 on the beach and Eileen will earn $240 at her stand, so they will each take $110+$2A0
2 his personal cost (or disutility) of working hard as opposed to shirking at $30. home half of their total revenue: = $175 . If Clancy shirks, he'll generate only $60 in earnings. Eileen does not know that Clancy estimates Once out of Eileen's sight, Clancy faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Clancy's total utility, it is better for him to work hard V . Taking into account the loss in utility that working hard brings to Clancy, Eileen and Clancy together are v better off if Clancy works hard instead of shirking. Eileen knows Clancy will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Clancy. The most Eileen should be willing to pay Carrie to supervise Clancy, assuming supervision is sufficient to encourage Clancy to work hard, is V . It turns out that Eileen's friend Carrue is unavilable that day, so Eileen cannot find a reliable person to watch Clancy. which of the following arrangements will ensure that Clancy works hard without making Eileen any worse off than she is when Clancy shirks? if) Allow Clancy to keep 75% of the revenue from the bottles of water he sells instead of 50% A Allow Clancy to keep 57% of the revenue from the bottles of water he sells instead of 50% A i , ‘ Make Clancy promise to work hard (it Pay Clancy $20, regardless of how many bottles of water he sells

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