3. A risk-neutral principal hires an agent to work on a project at wage w. The agent's utility function is:v(w)-g(e), where v(w)= Jw and g(e)=e/2 The agent can choose one of two possible effortlevels, e¡= 4 or e, = 6 . If the agent chooses effort level e,= 4 the project yields 100 with probability1/4 and 0 with probability 3/4. If he chooses e, = 6 the project yields 100 with probability ½ and 0 withprobability ½. The reservation utility of the agent is 0.(a) Suppose the effort level chosen by the agent is observable by the principal. Find the contract chosenby the principal. Show graphically in terms of contingent utilities v(w,00) and v(w.)

Risk-neutral principal- A person who does not care about the risk involved with the project and is…

3. A risk-neutral principal hires an agent to work on a project at wage w. The agent's utility function is: v(w) – g(e), where v(w) = √w and g(e)=e/ 2 The agent can choose one of two possible effort levels, e₁ = 4 or e₂ = 6. If the agent chooses effort level e₁ = 4 the project yields 100 with probability 1/4 and 0 with probability 3/4. If he chooses e₂ = 6 the project yields 100 with probability%2 and 0 with probability %. The reservation utility of the agent is 0. (a) Suppose the effort level chosen by the agent is observable by the principal. Find the contract chosen by the principal. Show graphically in terms of contingent utilities v(w₁00) and v(wo)

3. A risk-neutral principal hires an agent to work on a project at wage w. The agent's utility function is: v(w) – g(e), where v(w) = √w and g(e)=e/ 2 The agent can choose one of two possible effort levels, e₁ = 4 or e₂ = 6. If the agent chooses effort level e₁ = 4 the project yields 100 with probability 1/4 and 0 with probability 3/4. If he chooses e₂ = 6 the project yields 100 with probability%2 and 0 with probability %. The reservation utility of the agent is 0. (a) Suppose the effort level chosen by the agent is observable by the principal. Find the contract chosen by the principal. Show graphically in terms of contingent utilities v(w₁00) and v(wo)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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