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					Name ________________________
                                          Incentives
An incentive is a cost or benefit that motivates a decision or action by consumers, workers, firms
or other participants in the economy.

Scenario 1:    Your parents are tired of having to tell you to take out the trash. They want you
               to learn to recognize when the trash has to go out and do it without them nagging
               you. After much discussion they come up with four alternatives.

A.     Instead of asking you to take out the garbage, your parents could take it out instead to
       model the behavior you should have.
B.     Your parents could never say anything and wait for you to take out the garbage no matter
       how long it takes.
C.     Your parents could promise you $20 at the end of the week if you take out the garbage
       without them asking you.
D.     Your parents could decide to nag you even more.

Which choices are positive incentives? ______________________________________________
Which choices are negative incentives? _____________________________________________
Which of the choices is most likely to change your behavior? ____________________________
______________________________________________________________________________
What is the incentive that motivated you to change? ___________________________________
______________________________________________________________________________
Why was that incentive stronger than the others? ______________________________________
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Scenario 2:    Bill is working for a large company. He has an idea for a new product but the
               company he works for is not interested in his idea. Bill would like to try to make
               the new product on his own but that would mean leaving the job he has now.

What is an incentive that would make Bill leave the job he has now? ______________________
______________________________________________________________________________
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If you were Bill would you be more or less likely to leave the job if you were making $75.000 a
year or $30,000 a year and why? ___________________________________________________
______________________________________________________________________________
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What is an incentive that might cause Bill’s company to decide to produce his product? _______
______________________________________________________________________________
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Scenario 3:   Your parents want you to get out of bed earlier so that you are not late for school.
              They have decided to use money ($20 a week) as an incentive. The amount will
              be adjusted each week based on the number of days in the school week (i.e for
              weeks with only 4 days of school, you would get $5 a day). However, they are
              not sure how to structure the incentive. The three choices they have are:
A.     If you get up early and leave for school on time they will hand you $4 (or the adjusted
       daily amount) on the way out the door.
B.     They promise you $20 at the end of the week but will take back $4 (or the adjusted
       amount) for every morning that you are late.
C.     They promise you $20 at the end of the week but only if you are up early and on time
       every day that week.
Which choice is most likely to change your behavior? __________________________________
______________________________________________________________________________
Why is that incentive stronger than the others? ________________________________________
______________________________________________________________________________
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In each case, the amount of the incentive was the same. How could the structure of the incentive
(how it was given out) change the effect on someone’s behavior? _________________________
______________________________________________________________________________
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Scenario 4:   A company that makes copier machines wants to increase its sales. It has decided
              to hire an additional salesperson but needs to think about how to pay that person.
              The head of the company has three proposals:
A.     Give the salesperson a low salary and a percentage of each sale price (commission).
B.     Give the salesperson a medium salary but offering a significant bonus for meeting a sales
       quota (they have to sell a certain amount or they do not get the bonus)
C.     Give the salesperson a high salary with no commissions or bonuses.
Assuming you have no other information about this scenario, which of the following would be
most likely to encourage a salesperson to make more sales and why? ______________________
______________________________________________________________________________
______________________________________________________________________________
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If you could ask one more question about the payment plans what would it be? ______________
______________________________________________________________________________
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Why would that information be important for you to know? _____________________________
______________________________________________________________________________
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Scenario 5:    (Challenge) A medium sized company is trying to decide if it should offer health
               insurance to its new employees. Adding insurance would increase the cost to the
               company of each worker about 10-15%. The executives in charge of the company
               are considering several factors.

Rank the incentives that follow (1 = strongest - 6 = weakest)

___    Jobs that offer health insurance have more applicants which would mean the company
       might be able to attract better workers.

___    The business’ competitors do not offer health insurance to their employees.

___    Employees with health care tend to be more productive for a variety of reasons.

___    Health care costs are rising rapidly and the insurance premiums paid by employers are
       going up too.

___    Congress is considering (but has not made a final decision) requiring companies to pay
       higher taxes if they do not provide health insurance to employees.

___    Congress is considering (but has not made a final decision) requiring employees to pay
       taxes on the value of their health insurance as if it were salary.

If you had to make the decision, would you give new employees health insurance? ___________
In your own words, describe why you made the choice you did. __________________________
______________________________________________________________________________
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What other factors, not listed, influenced your decision? ________________________________
______________________________________________________________________________
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Which had a bigger effect on your decision, positive or negative incentives and why? _________
______________________________________________________________________________
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