One reason it's difficult for a manager to set up good incentives is because it's easy for employees to lie about how they'll respond to incentives.

For example, Simple Books pays Mary Sue to proofread chapters of new books. After an author writes a draft of a book, Simple sends chapters out to proofreaders like Mary Sue to make sure that spelling, punctuation, and basic facts are correct.

As you can imagine, some books are easy to proofread (perhaps Westerns and romances), while others are hard to proofread (perhaps engineering textbooks).

But what's difficult or easy is often in the eye of the beholder: Simple can't tell which books are particularly easy for Mary Sue to proof, so they have to take her word for it. Let's see how this fact influences the publishing industry. In the following figure, Q* is the number of chapters in the new book Burned:

The Secret History of Toast. It's a strange mix of chemistry and history, so Simple isn't sure how Mary Sue will feel about proofing it. The marginal cost curve shows Mary Sue's true willingness to work: The more chapters she has to read, the more you have to pay her. If Simple offers to pay her $50 per chapter, as shown, she'll actually finish the job.

a. If Mary Sue wants to bluff, claiming that the book is actually painful to read, what is that equivalent to?

Supply curve shifting left

Supply curve shifting right

Demand curve shifting down

Demand curve shifting up

Once you decide, make the appropriate shift in the figure.

b. The publisher just has to have Mary Sue proof all Q* chapters of Burned: All its other proofreaders are busy. The publisher will pay what it needs to for her to finish the book. This is the same as another curve shift in a certain direction: Draw in this shift in the figure.

c. What did Mary Sue's complaining do to her price per chapter? What did it do to her work load?

d. (Bonus) You've seen how Mary Sue's bluffing influenced the outcome. What are some things that Simple might do to keep this from happening?