Expectation Problem

[Dreyfus]

I am getting expected profit as 400
Please help me with other parts also...Thanks!

[The Villain]

Is it ISI quest?

[Dreyfus]

Yes, its from 2008 me2

[The Villain]

i did it this way
p(efficient)=.25    p(inefficient)=.75
p(sold/efficient)=.8     p(sold /inefficient)=.4

revenue 10000 if was machine is sold
profit =1000*p(sold)-100
p(sold)=P(efficient)*p(sold/efficient)+p(sold /inefficient)=.5
therefore profit =400
and bonus should be higher than 10% i guess..

[Dreyfus]

But how 10%?

[SINGHAM]

Will you please solve that Lucas problem, please?

[The Villain]

Sorry Singham.I couldn't solve part b of LUcas.

[kangkan]

Hi...here is my take..the firm will maximize profit when the workers self select..hence it must but t such that inefficient people are not attracted and efficient are..

for an inefficient E(earning)= 0.4*1000*t/100..this must be less than 80.this gives t=20....now at t=20 and efficient worker will make E(earnings0= 160..hence it will hire all efficient people..now if it hires only efficiet people its expected profit  is 540>400..hence this is profit maximizing

Regards