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Consider observable effort. Assume that if the Agent does not accept the wage the Principal offers his outside option gives him a net utility of v 2. The probability of high profit under e=1 is ½, the probability of high profit under low effort is 1/4. Calculate the minimum wage that the agent will accept to work and supply the asked effort when the Principal asks him to supply e=0, and e=1. Let us call these wages wo and wi. Now, assume that instead of offering him a flat wage, the Principal is offering the agent a wage schedule (@, w) where the agent receives when the (gross) profit is High and w when the (gross) profit is low. Calculate all the lowest cost wage schedules the agent will accept to supply e=1, and e=0. Does the principal's expected net profit change when he pays the minimum cost wage schedule instead of the flat wage minimum cost wage? Explain the intuition for your answer.

Consider observable effort. Assume that if the Agent does not accept the wage the Principal offers his outside option gives him a net utility of v 2. The probability of high profit under e=1 is ½, the probability of high profit under low effort is 1/4. Calculate the minimum wage that the agent will accept to work and supply the asked effort when the Principal asks him to supply e=0, and e=1. Let us call these wages wo and wi. Now, assume that instead of offering him a flat wage, the Principal is offering the agent a wage schedule (@, w) where the agent receives when the (gross) profit is High and w when the (gross) profit is low. Calculate all the lowest cost wage schedules the agent will accept to supply e=1, and e=0. Does the principal's expected net profit change when he pays the minimum cost wage schedule instead of the flat wage minimum cost wage? Explain the intuition for your answer.

Algebra & Trigonometry with Analytic Geometry
Algebra & Trigonometry with Analytic Geometry
13th Edition
ISBN:9781133382119
Author:Swokowski
Publisher:Swokowski
Chapter5: Inverse, Exponential, And Logarithmic Functions
Section5.6: Exponential And Logarithmic Equations
Problem 64E
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1) Consider observable effort. Assume that if the Agent does not accept the wage the Principal offers his outside option gives him a net utility of v =2. The probability of high profit under e=1 is %, the probability of high profit under low effort is 1/4. Calculate the minimum wage that the agent will accept to work and supply the asked effort when the Principal asks him to supply e=0, and e=1. Let us call these wages wo and wi. Now, assume that instead of offering him a flat wage, the Principal is offering the agent a wage schedule (, w) where the agent receives when the (gross) profit is High and w when the (gross) profit is low. Calculate all the lowest cost wage schedules the agent will accept to supply e=1, and e=D0. Does the principal's expected net profit change when he pays the minimum cost wage schedule instead of the flat wage minimum cost wage? Explain the intuition for your answer.
Transcribed Image Text:1) Consider observable effort. Assume that if the Agent does not accept the wage the Principal offers his outside option gives him a net utility of v =2. The probability of high profit under e=1 is %, the probability of high profit under low effort is 1/4. Calculate the minimum wage that the agent will accept to work and supply the asked effort when the Principal asks him to supply e=0, and e=1. Let us call these wages wo and wi. Now, assume that instead of offering him a flat wage, the Principal is offering the agent a wage schedule (, w) where the agent receives when the (gross) profit is High and w when the (gross) profit is low. Calculate all the lowest cost wage schedules the agent will accept to supply e=1, and e=D0. Does the principal's expected net profit change when he pays the minimum cost wage schedule instead of the flat wage minimum cost wage? Explain the intuition for your answer.
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