2. Suppose, as in class, that the utility function of a worker is U(w, e)=√w-e, where w is the wage and e € {0,.8} is the level of effort. Suppose the reservation utility is 1. Suppose the outcome is $10 or $0 and that the probability of the $10 outcome is .6 if the worker works hard and .2 if the worker chooses low effort. (a) If you could costlessly monitor the worker's effort, would you want the worker to work hard? What payments would you offer and for what effort?

2. Suppose, as in class, that the utility function of a worker is U(w, e)=√w-e, where w is the wage and e € {0,.8} is the level of effort. Suppose the reservation utility is 1. Suppose the outcome is $10 or $0 and that the probability of the $10 outcome is .6 if the worker works hard and .2 if the worker chooses low effort. (a) If you could costlessly monitor the worker's effort, would you want the worker to work hard? What payments would you offer and for what effort?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

2. Suppose, as in class, that the utility function of a worker is
U (w, e) = Vw - e,
where w is the wage and e € {0, .8} is the level of effort. Suppose the reservation
utility is 1.
Suppose the outcome is $10 or $0 and that the probability of the $10 outcome
is .6 if the worker works hard and .2 if the worker chooses low effort.
(a) If you could costlessly monitor the worker's effort, would you want the
worker to work hard? What payments would you offer and for what
effort?

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