Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 13

BK Books is an online book retailer that also has 10,000 "bricks and mortar" outlets worldwide. You are a risk-neutral manager within the Corporate Finance Division and are in dire need of a new financial analyst. You only interview students from the top MBA programs in your area. Thanks to your screening mechanisms and contacts, the students you interview ultimately differ only with respect to the wage that they are willing to accept. About 10 percent of acceptable candidates are willing to accept a salary of $70,000, while 90 percent demand a salary of $100,000. There are two phases to the interview process that every interviewee must go through. Phase 1 is the initial one-hour on-campus interview. All candidates interviewed in Phase 1 are also invited to Phase 2 of the interview, which consists of a five-hour office visit. In all, you spend six hours interviewing each candidate and value this time at $900. In addition, it costs a total of $4,900 in travel expenses to interview each candidate. You are very impressed with the first interviewee completing both phases of BK Books's interviewing process, and she has indicated that her reservation salary is $100,000. Should you make her an offer at that salary or continue the interviewing process? Explain.