A principal is considering hiring a lawyer to represent him or her in a lawsuit. The principal gets $ 250 000 if the suit is won and $0 otherwise. If the agent works hard (100 hours), there is a 50% chance that the principal will win the suit. If the agent does not work hard (10 hours), there is a 15% chance that the principal will win the suit. Without a lawyer, the principal is sure to lose the suit. The principal can monitor the agent, and both parties are risk neutral. The agent's utility function is m-50e, where m is money in dollars and e is effort in hours. The agent's fee for this case is $100 per hour, and the outside opportunity is worth $500. Write down the game in extensive form and solve it.

A principal is considering hiring a lawyer to represent him or her in a lawsuit. The principal gets $ 250 000 if the suit is won and $0 otherwise. If the agent works hard (100 hours), there is a 50% chance that the principal will win the suit. If the agent does not work hard (10 hours), there is a 15% chance that the principal will win the suit. Without a lawyer, the principal is sure to lose the suit. The principal can monitor the agent, and both parties are risk neutral. The agent's utility function is m-50e, where m is money in dollars and e is effort in hours. The agent's fee for this case is $100 per hour, and the outside opportunity is worth $500. Write down the game in extensive form and solve it.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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