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1. An employee earns a salary of $16 per hour. When the employee's tasks are successfully
completed, the employee also earns a bonus of $20 per hour, the total hourly salary therefore
becoming $36 per hour. The employee estimates the probability of successfully completed the
task and therefore earning the bonus as being equal to 50%. The individual's utility function is
utility function () = where W stands for the individual's wealth.
a. Calculate the expected salary (including bonus) of this employee.
b. Calculate the expected utility of this employee.
c. Assume that a constant salary that would be independent of whether the task is successfully
completed or not is offered to this employee. What would be the lowest salary the employee
would accept in order to avoid having to face the volatility that comes with a bonus-based
remuneration? Assume that the effort and all other relevant parameters remain unchanged
irrespective of the type of remuneration being adopted.

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1. An employee earns a salary of $16 per hour. When the employees t.pdf

  • 1. 1. An employee earns a salary of $16 per hour. When the employee's tasks are successfully completed, the employee also earns a bonus of $20 per hour, the total hourly salary therefore becoming $36 per hour. The employee estimates the probability of successfully completed the task and therefore earning the bonus as being equal to 50%. The individual's utility function is utility function () = where W stands for the individual's wealth. a. Calculate the expected salary (including bonus) of this employee. b. Calculate the expected utility of this employee. c. Assume that a constant salary that would be independent of whether the task is successfully completed or not is offered to this employee. What would be the lowest salary the employee would accept in order to avoid having to face the volatility that comes with a bonus-based remuneration? Assume that the effort and all other relevant parameters remain unchanged irrespective of the type of remuneration being adopted.