Question

Decisions Involving Private Information - End of Chapter Problem Sophia operates her own accounting practice and is looking to hire two entry-level accountants. A high-productivity worker will generate $90,000 in revenue per year and a low-productivity worker will generate $60,000. Tasia is a high-productivity worker and wants a salary of at least $80,000. Rick is a low-productivity worker and wants at least a $55,000 salary. a. If Sophia can easily identify the type of worker, she should hire___Sophia's total profit will be____.

Answer 1

Sophia should hire Tasia if she can identify the worker type because Tasia brings in a higher profit of $10,000. If hiring both Tasia and Rick, Sophia's total profit would be $15,000.

Step-by-step explanation:

Sophia stands to generate different levels of profit depending on whether she hires Tasia, a high-productivity worker, or Rick, a low-productivity worker. If she can easily identify the productivity type of the worker, she should make her hiring decision based on the potential revenue generation compared to the salary expectations of each candidate. For Tasia, who wants a salary of $80,000, the profit for Sophia would be $90,000 (revenue) - $80,000 (salary) = $10,000. For Rick, who wants a $55,000 salary, the profit would be $60,000 (revenue) - $55,000 (salary) = $5,000.

Hence, if Sophia can identify the type of worker, she should hire Tasia, and Sophia's total profit will be $10,000 for this worker. In the case of hiring both workers, considering they are the only employees, Sophia's total profit will be $10,000 + $5,000 = $15,000.