A principal is considering hiring a lawyer to represent him or her in a lawsuit. The principal gets $ 250 000 if the suit is won and $0 otherwise. If the agent works hard (100 hours), there is a 50% chance that the principal will win the suit. If the agent does not work hard (10 hours), there is a 15% chance that the principal will win the suit. Without a lawyer, the principal is sure to lose the suit. The principal can monitor the agent, and both parties are risk neutral. The agent's utility function is m-50e, where m is money in dollars and e is effort in hours. The agent's fee for this case is $100 per hour, and the outside opportunity is worth $500. Write down the game in extensive form and solve it.

A principal is considering hiring a lawyer to represent him or her in a lawsuit. The principal gets $ 250 000 if the suit is won and $0 otherwise. If the agent works hard (100 hours), there is a 50% chance that the principal will win the suit. If the agent does not work hard (10 hours), there is a 15% chance that the principal will win the suit. Without a lawyer, the principal is sure to lose the suit. The principal can monitor the agent, and both parties are risk neutral. The agent's utility function is m-50e, where m is money in dollars and e is effort in hours. The agent's fee for this case is $100 per hour, and the outside opportunity is worth $500. Write down the game in extensive form and solve it.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.2IP

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