Assume, in producing one unit of a good X, an agent can exert either the good effort (G) or the bad effort (L), which cause production defects with probability 0.25 or 0.75 respectively. His utility function in effort e and wage w is U(w, e) = 100 - (10/w) - c(e) where c(G) = 2 for the good effort and c(L) = () for the bad effort. Production defects are contractible and so can be included in the agent's contract, but effort is not contractible. Good X sells for $20 if there are no defects and $0 otherwise. The principal is risk-neutral and likes profit. Assume the agent has a reservation utility/outside option of U=0. If effort is not contractible then: Select one: O a. There is insufficient information to know the principal's choice of contract because we do not know the agent's level of absolute risk aversion. O b. the principal will be indifferent between writing a contract to achieve the good effort level and writing a contract to achieve the bad effort level O c. the principal will write a contract to achieve the good effort level O d. the principal will write a contract to achieve the bad effort level

Assume, in producing one unit of a good X, an agent can exert either the good effort (G) or the bad effort (L), which cause production defects with probability 0.25 or 0.75 respectively. His utility function in effort e and wage w is U(w, e) = 100 - (10/w) - c(e) where c(G) = 2 for the good effort and c(L) = () for the bad effort. Production defects are contractible and so can be included in the agent's contract, but effort is not contractible. Good X sells for $20 if there are no defects and $0 otherwise. The principal is risk-neutral and likes profit. Assume the agent has a reservation utility/outside option of U=0. If effort is not contractible then: Select one: O a. There is insufficient information to know the principal's choice of contract because we do not know the agent's level of absolute risk aversion. O b. the principal will be indifferent between writing a contract to achieve the good effort level and writing a contract to achieve the bad effort level O c. the principal will write a contract to achieve the good effort level O d. the principal will write a contract to achieve the bad effort level

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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