1. Suppose a manager hires a technician to operate the machine for$5000 per month. The firm’s monthly revenue depends on only twofactors: (1) luck and (2) effort exerted by the technician. Theprobability of having good luck and that of having bad luck areboth 0.5. The technician can choose to exert high effort or loweffort, depending on which option maximizes his monthly income.Assume that low effort does not cost the technician while higheffort costs him $1000. Below is the firm’s payoff table:

	Good luck (50% chance)	Bad luck (50% chance)
Low effort	24,000	12,000
High effort	40,000	24,000

1. If the technician is paid with a fixed amount of $5000 permonth, which level of effort would he choose? Provide yourreasoning.
2. What is the corresponding expected revenue for the firm?
3. If the manager tries to improve the firm’s expected revenue byoffering a pay for performance scheme, why do you think this may ormay not work to exert high effort from the technician?
4. If the pay for performance scheme is listed as thefollowing:

(1) If the revenue is below or equalto 24,000, then the technician receives $5000.

(2) If the revenue is larger than24,000, then the technician receives $5000 plus a bonus of Xdollars.

If the bonus is 3000 dollars, would itencourage the technician to put in high effort? Make sure yousupport your answer with numerical values.

5. Continue the pay for performance scheme. What is the minimumamount of bonus so that the technician is willing to exert higheffort?