Offer W1 in year 1; W2 in year 2 only to those retained
W1 < W2

• Value of E-types applying = W1 + q•W2 + (1–q)•WE
• Alternative for E-types = 2•WE

• Value of D-types applying = W1 + (1-q)•W2 + q•WD
• Alternative for D-types = 2•WD

1. Lorne Roberts Corp. has invested a lot of money in their employee screening process over the last few years for computer technicians. This company can assess whether to promote employees on probation accurately 90% of the time. But 10% of the time the company still inaccurately assesses employees on probation by terminating an employee who fits successfully in the job or promoting an employee who does not fit well in the job.

The WD for computer technicians is $30,000 per year. The WE for this position is $40,000.

Lorne Roberts Corp. is considering which W1 and W2 will encourage E’s to apply while discouraging D’s from applying. Out of the three options below, which is the best salary structure for the first two years:

A) W1 = $30,000; W2 = $42,000

B) W1 = $40,000; W2 = $52,000

C) W1 = $24,000; W2 = $59,000