Could you please explain the solution?15. A worker with access to a competitive wage W=500, can choose between a high effort levele=1or a low effort level e=0 with respective costs c(e=1)=50, c(e=0)%3D0 and operates a stochastictechnology yielding a high level product Q (as opposed to a low level product a) with probabilityP=1/3 if e=1, or with probability p=1/4 if e=0 (undercircumstances making it socially efficient a high effort level). Then, the efficiency wage of optimalcontract of a risk-neutral principal is:a) 100b) 500c) 1000d) 1100.e) none of the previous statements a-d is correct.

The principal-agent problem is a popular case of moral hazard. Here, the principal wants to maximize…

15. A worker with access to a competitive wage W-500, can choose between a high effort level e=1or a low effort level e=0 with respective costs c(e-1)=50, c(e=0)=0 and operates a stochastic technology yielding a high level product Q (as opposed to a low level product q) with probability P=1/3 if e=1, or with probability p=1/4 if e-0 (under circumstances making it socially efficient a high effort level). Then, the efficiency wage of optimal contract of a risk-neutral principal is: a) 100 b) 500 c) 1000 d) 1100. e) none of the previous statements a-d is correct.

15. A worker with access to a competitive wage W-500, can choose between a high effort level e=1or a low effort level e=0 with respective costs c(e-1)=50, c(e=0)=0 and operates a stochastic technology yielding a high level product Q (as opposed to a low level product q) with probability P=1/3 if e=1, or with probability p=1/4 if e-0 (under circumstances making it socially efficient a high effort level). Then, the efficiency wage of optimal contract of a risk-neutral principal is: a) 100 b) 500 c) 1000 d) 1100. e) none of the previous statements a-d is correct.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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