, agent 2 and agent 3, work independently on full commission. Assume to begin with that individual effort is observable, and that total output is given by Q = 10(E1 + E2 + E2). Agents are paid a salary of a + Qi (where Q1 = 10 E1 = output from agent 1; Q2 = 10E2 = output from agent 2 = 10E2 and so on). Each agent has an alternative utility level of 10 units, and the cost of effort C(E) = E2. Answer the following questions. a) Given this compensation scheme, what is the (privately) optimal amount of effort for agent 1? b) How many pies does she make? c) What must the fixed portion of agent 1’s income (a) be for her utility on this job to exactly equal 10? d) What is agent 1’s total income in the above
John is a manager at a small English Bakery that sells gooseberry pies. Currently, each of his three employees, agent 1, agent 2 and agent 3, work independently on full commission. Assume to begin with that individual effort is observable, and that total output is given by Q = 10(E1 + E2 + E2). Agents are paid a salary of a + Qi (where Q1 = 10 E1 = output from agent 1; Q2 = 10E2 = output from agent 2 = 10E2 and so on). Each agent has an alternative utility level of 10 units, and the cost of effort C(E) = E2. Answer the following questions.
a) Given this compensation scheme, what is the (privately) optimal amount of effort for agent 1?
b) How many pies does she make?
c) What must the fixed portion of agent 1’s income (a) be for her utility on this job to exactly equal 10?
d) What is agent 1’s total income in the above situation?
e) Check to see that agent 1’s utility level is in fact 10 when she gets this total income and chooses her effort optimally.
f) What is the profit for the firm that is produced by agent 1? Are your answers the same for agents 2 and 3?
g) Find the firm’s total profit from all three workers combined.
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