1. The prize money at large poker tournaments is in the millions o...

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1. The prize money at large poker tournaments is in the millions of dollars. To participate in such tournaments, however, players have to first pay entry fees or “buy-ins.” For high-prize events such as main events on the World Tour of Poker, these buy-ins can easily reach $10,000. Since even the best poker players lose a lot more often than they win, these buy-ins constitute significant investments for professional poker players. To finance buy-ins, such players rely on two common arrangements: "stacking" and "backing." Let’s look at stacking first. Under a stacking arrangement, a player sells a share in any prize money he or she may win at a specific tournament in return for an upfront payment that is used to cover the buy-in. Suppose, for instance, that a player wants to sell a 10% share in his winnings at a specific tournament to an investor. In return for the share, the investor would pay the player 10% times the buy-in times a “markup.” If, for instance, the buy-in were $10,000 and the markup were 1.25, the investor would have to pay the player 10%*$10,000*1.25 = $1,250 for the 10% share. Tilisha Evans also played at the 2012 World Series of Poker main event. In contrast to Jake Balsiger, however, she relied on a “backer” to finance the buy-in. The standard backing arrangement she used is called “fifty-fifty with make up.” Under this arrangement, the backer paid the entire $10,000 buy-in. In return, Tilisha promised to pay the backer: (a.) all her prize money if she wins less than $10,000 and (b.) $10,000 plus 50% of the difference between her prize money and $10,000 if she wins more than $10,000. Suppose the backer wanted to make Tilisha's pay more sensitive to her performance (where her performance is measured by her prize money). Which of the following changes to the backing arrangement would allow him to do so (note that you can pick more than one from the list below)? Group of answer choices a. Only cover a fraction of the buy in and insist that Tilisha covers the rest out of her own pocket (but do not change the $10,000 threshold below which the backer gets all the prize money and above which he gets 50%). b. Reduce the $10,000 threshold below which the backer gets all the prize money and above which he gets 50%. c. Increase the $10,000 threshold below which the backer gets all the prize money and above which he gets 50%. d. Increase the fraction of the prize money that goes to the backer if prize money is above the $10,000 threshold. e. Reduce the fraction of the prize money that goes to the backer if prize money is above the $10,000 threshold. 2. The article “Fin-tech” (The Economist, Jan 26, 2016) traces today’s venture capital industry to 19th century whaling firms in and around New Bedford, Massachusetts. It describes these firms as “the first venture capitalists” and argues that, while whaling soon disappeared, “the business structures pioneered in New Bedford remain as relevant as they ever were. Without them, the tech booms of the 1990s and today would not have been possible.” It then goes on to describe the following system: “At the top of the New Bedford hierarchy was an agent or firm of agents like Gideon Allen, responsible for the purchase and outfitting of the ship, the hiring of the crew and the sale of the catch. To give them an incentive to cut the best deals possible, the agents put up a big share of the investment. Those with the best reputation received better terms from the other investors. Captains, who ran the show while the ship was at sea, often put up capital as well. A similar system of incentives is used in the riskier reaches of the investment-management business today, notes Mr Nicholas. Investors received half to two-thirds of the profits. The rest was divided among the crew in what was known as the “lay” system. A captain might get a 12th lay (one-twelfth of the remaining profit). In Melville’s novel, Ishmael, who was new to the business, was originally offered a 777th lay but managed to haggle a 300th. Although that would probably have proved a paltry amount, it was a stake nonetheless, and set a benchmark for future pay. Ishmael’s friend Queequeg, a cannibal from the South Sea islands, got a 90th lay because he had experience with a harpoon.” Suppose the investors in Melville’s novel got two-thirds of the profits. What was the sensitivity of pay to performance of the pay package that Ishmael managed to negotiate (where performance is measured by profits)? a. 22.% b. 11% c. 4% d. .22% e. .11% f. .04% 3. Recall from the previous question that: "Ishmael’s friend Queequeg, a cannibal from the South Sea islands, got a 90th lay because he had experience with a harpoon." Continue to suppose that the investors in Melville’s novel got two-thirds of the profits. If Queequeg had done something that increased profits by $1,000, how much would his pay have increased? a. $370 b. $111.1 c. $11.1 d. $6.4 e. $3.7 f. $1.85 4. Cristina Figueroa works as a realtor for Century 21. Cristina’s job is to help clients sell their homes. The standard price that Century 21 charges its customers for Cristina’s services is 6% of the sales price of a house. Half of these 6% are paid to the buyer’s realtor. The other half is split between Cristina and her employer, with Cristina getting 60% and Century 21 the remaining 40%. In addition to her commission, Cristina is also paid a monthly wage of $2000. Cristina’s monthly pay is illustrated in this graph , where the horizontal axis measures Cristina’s Gross Commission Income “GCI,” which is the sum of all the commissions that her clients paid in a month (i.e. 3% of the sales prices of all the homes Cristina sold in a month). According to the Economic View of Motivation, what feature of the pay curve in the graph matters most for Cristina's decision to continue to work at Century 21? a. Its slope (i.e. how steep it is) b. Its intercept (i.e. its height at zero GCI) c. Its height at Cristina's average GCI d. The fraction of Cristina's total pay that is variable. 5. According to the Economic View of Motivation, what feature of the pay curve in the graph determines how hard Cristina works at Century 21? a. Its slope (i.e. how steep it is) b. Its intercept (i.e. its height at zero GCI) c. Its height at Cristina's average GCI d. The fraction of Cristina's total pay that is variable. 6. Even though Cristina's payment scheme is very common in the industry, there are many different ways in which agents get paid, including the following: Scheme 1: The agent gets 100% of the GCI but pays the firm a fixed fee of $5000. Scheme 2: Like Scheme 1 but instead of paying a fee of $5000, the agent gets 0% of the first $5000 of GCI (and 100% of GCI above $5000). Scheme 3: Agent gets 33% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 100% of GCI above $80,000. Scheme 4: Agent gets 100% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 33% of GCI above $80,000. Scheme 5: Agent gets 60% of GCI and a $5000 bonus if GCI is above $50,000. Scheme 6: Agent gets a wage of $2500 and a bonus of $5000 if GCI is above $50,000. Scheme 7: Agent gets paid 50% of GCI with a guaranteed minimum pay of $2000. Scheme 8: Agent gets 50% of GCI but pay is capped at $50,000. Which scheme is illustrated by this graph ? 7. Which scheme is illustrated by this graph ? Recall that the different schemes are: Scheme 1: The agent gets 100% of the GCI but pays the firm a fixed fee of $5000. Scheme 2: Like Scheme 1 but instead of paying a fee of $5000, the agent gets 0% of the first $5000 of GCI (and 100% of GCI above $5000). Scheme 3: Agent gets 33% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 100% of GCI above $80,000. Scheme 4: Agent gets 100% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 33% of GCI above $80,000. Scheme 5: Agent gets 60% of GCI and a $5000 bonus if GCI is above $50,000. Scheme 6: Agent gets a wage of $2500 and a bonus of $5000 if GCI is above $50,000. Scheme 7: Agent gets paid 50% of GCI with a guaranteed minimum pay of $2000. Scheme 8: Agent gets 50% of GCI but pay is capped at $50,000. Which scheme is illustrated by this graph ? Recall that the different schemes are: Scheme 1: The agent gets 100% of the GCI but pays the firm a fixed fee of $5000. Scheme 2: Like Scheme 1 but instead of paying a fee of $5000, the agent gets 0% of the first $5000 of GCI (and 100% of GCI above $5000). Scheme 3: Agent gets 33% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 100% of GCI above $80,000. Scheme 4: Agent gets 100% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 33% of GCI above $80,000. Scheme 5: Agent gets 60% of GCI and a $5000 bonus if GCI is above $50,000. Scheme 6: Agent gets a wage of $2500 and a bonus of $5000 if GCI is above $50,000. Scheme 7: Agent gets paid 50% of GCI with a guaranteed minimum pay of $2000. Scheme 8: Agent gets 50% of GCI but pay is capped at $50,000. 9. Which scheme is illustrated by this graph ? Recall that the different schemes are: Scheme 1: The agent gets 100% of the GCI but pays the firm a fixed fee of $5000. Scheme 2: Like Scheme 1 but instead of paying a fee of $5000, the agent gets 0% of the first $5000 of GCI (and 100% of GCI above $5000). Scheme 3: Agent gets 33% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 100% of GCI above $80,000. Scheme 4: Agent gets 100% of the first $40,000 of GCI, 66% of GCI between $40,000 and $80,000, and 33% of GCI above $80,000. Scheme 5: Agent gets 60% of GCI and a $5000 bonus if GCI is above $50,000. Scheme 6: Agent gets a wage of $2500 and a bonus of $5000 if GCI is above $50,000. Scheme 7: Agent gets paid 50% of GCI with a guaranteed minimum pay of $2000. Scheme 8: Agent gets 50% of GCI but pay is capped at $50,000.

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