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
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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 |
| $35,000 | 0.1 |
| $42,000 | 0.1 |
| $49,000 | 0.1 |
| $56,000 | 0.1 |
| $63,000 | 0.1 |
| $70,000 | 0.1 |
| $77,000 | 0.1 |
| $84,000 | 0.1 |
| $91,000 | 0.1 |
| $94,000 | 0.1 |
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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Part 1: $66,100
The expected value of hiring one person is 0.1(35+42+49+56+63+70+77+84+91+94)*1,000=$66,100.
Part 2: $45,500
Only employees with a value at or below $66,100 will apply for the job which is the four lowest value employees. The expected value of them is 0.25(35+42+49+56)*1,000=$45,500 and thus you would lose money.
Part 3: $35,000
You would offer the lowest salary because only at this salary is the expected value or the workers equal to their salary.
