question archive You need to hire some new employees to staff your startup venture
You need to hire some new employees to staff your startup venture
Subject:EconomicsPrice:2.87 Bought7
You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them:
Employee Value Probability
$55,0000 .25
$74,0000 .25
$93,0000 .25
$112,0000 .25
The expected value of hiring one employee is.____________
Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value.
The expected value of an employee who would apply for the position, at this salary, is__________.
Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is ______________ .
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Answer:
Expected value=$83500
The expected value of an employee who would apply for the position is =$64500
The most reasonable salary offer=$55000
Step-by-step explanation
Expected value=ΣEmployee value*probability
=55000*0.25+74000*0.25+93000*0.25+112000*0.25
=$83500
The expected value of an employee who would apply for the position is as follows;
55000*0.5+74000*0.5(This is because the employees with $55000 and $74000 will accept this offer because it is more than their employee value)
=$64500
The most reasonable salary offer is $55000(This is the only rational offer to make because the expected value has dropped to $64500 and the employee with a value of $55000 will accept this offer)
