a) Suppose first that the low-value non-work activity does not exist and that the high-value non-work activity exists with a probability 0.10 (Interpretation: There is a 10 percent chance that the employee will need to perform an important child-care duty each day.) Suppose that your firm is considering offering this employee a telecommuting job. Assume here that if the employee telecommutes and the high-value activity arises, he spends all his time on this activity and creates no value for the firm that day. If the high-value non-work activity does not arise, he spends all his time working on behalf of the firm. What daily wage should you offer? What will your profits be? Is your firm better off than if it offered the employee a non-telecommuting job? Why?
b) Suppose now that the low-value non-work activity does exist. Unlike the high-value activity (which only arises with some probability), the low-value activity is always present. Suppose also that the firm cannot pay this employee based on individual performance because the available performance measures are of insufficient quality. Suppose that your firm offers the telecommuting job described in part (a). According to the multitask principle, how will the employee spend his time? Are your profits higher offering the telecommuting job or the non-telecommuting job?
c) Now suppose that the firm does have access to a good measure of individual performance. It can make pay contingent on whether the employee works on the firm’s activity. Which job (telecommuting or non-telecommuting) and compensation arrangement (fixed, or fixed plus some variable dependent on output) will maximize the firm’s profits? Comment on the types of jobs in which one might expect to see firms offer telecommuting.