Understanding how shirking decreases team output Eleanor sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Eleanor 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 Darnell 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. Eleanor knows that if they both work hard, Darnell will earn $110 on the beach and Eleanor will earn $240 at her stand, so they will each take home half of their total revenue: $110+$2402=$175$110+$2402=$175. If Darnell shirks, he'll generate only $60 in earnings. Eleanor does not know that Darnell estimates his personal cost (or disutility) of working hard as opposed to shirking at $30.
Once out of Eleanor's sight, Darnell faces a dilemma: work hard (put in full effort) or shirk (put in low effort).
In terms of Darnell's total utility, it is worse for him to .
Taking into account the loss in utility that working hard brings to Darnell, Eleanor and Darnell together better off if Darnell shirks instead of working hard.
Eleanor knows Darnell will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Darnell. The most Eleanor should be willing to pay Carrie to supervise Darnell, assuming supervision is sufficient to encourage Darnell to work hard, is .
It turns out that Eleanor's friend Carrue is unavilable that day, so Eleanor cannot find a reliable person to watch Darnell. Which of the following arrangements will ensure that Darnell works hard without making Eleanor any worse off than she is when Darnell shirks?
A. Allow Darnell to keep 75% of the revenue from the bottles of water he sells instead of 50%
B. Allow Darnell to keep 57% of the revenue from the bottles of water he sells instead of 50%
C. Pay Darnell $70, regardless of how many bottles of water he sells
D. Make Darnell promise to work hard