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.
Advanced Engineering Mathematics
10th Edition
ISBN:9780470458365
Author:Erwin Kreyszig
Publisher:Erwin Kreyszig
Chapter2: Second-order Linear Odes
Section: Chapter Questions
Problem 1RQ
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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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