Question

Fill in the blanks.

Sondra sells bottled water from a small stand by the beach. On the last day of summer vacation, there are many people on the beach, and Sondra realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Larry and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Sondra knows that if they both work hard, Larry will earn $80 on the beach and Sondra will earn $160 at her stand, so they will each take home $120. Sondra does not know that Larry estimates his personal cost (or disutility) of working hard as opposed to shirking at $20.
Once out of Sondra's sight, Larry faces a dilemma: Work hard (put in full effort) or shirk (put in low effort). If he works hard, he'll sell enough water to generate $80 in earnings (not including his personal cost). If he shirks, he'll only generate $50 in earnings. At the end of the day, he?ll split his earnings with Sondra and also get half of what she earns at her stand.
In terms of Larry's total utility, it is worse for him to ________________ .
Taking into account the loss in utility that working hard brings to Larry, Sondra and Larry together _____________ better off if Larry works hard instead of shirking.
Suppose Sondra knows Larry will shirk if unsupervised. She hires her good friend, Carrie, who happens to be free on that day, to keep an eye on Larry. The most Sondra should be willing to pay Carrie to supervise Larry, assuming supervision is sufficient to encourage Larry to work hard, is _________ .

Answer 1

1. work hard .

2. are

3. $15.

Step-by-step explanation:

1. In terms of Larry's total utility, it is worse for him to work hard .

Larry will prefer to shirk as this is easier for him to do than actually work hard, since he stands to generate $50. So it's worse for him to work hard.

2. Sondra and Larry together are better off if Larry works hard instead of shirking.

Sondra and Larry stand to generate more money if Larry works hard because they will lose if Larry decides to shirk instead.

3. The most Sondra should be willing to pay Carrie to supervise Larry, assuming supervision is sufficient to encourage Larry to work hard, is $15.

She should pay Carry an amount half the amount they stand to lose if Larry shirks. Since they stand to lose $30 if Larry shirks, she can pay Carrie $15 to supervise Larry.