Charles is participating in an experiment. His payoff in the experiment is tied to his effort e doing a mundane task. There is also some risk involved by design-there is a chance p that Charles is going to get a fixed payment L regardless of his effort. Charles' payoff is thus: with probability P w.e with probability 1- p L Charles has to pay a cost C, which increases with his effort. First, let us assume that Charles' utility is the expected payoff net of this cost: U(e) = pL + (1– p)we – c(e) Derive the first order condition with respect to e. b. How doesp affect Charles' effort e? C. How does L affect e?

Charles is participating in an experiment. His payoff in the experiment is tied to his effort e doing a mundane task. There is also some risk involved by design-there is a chance p that Charles is going to get a fixed payment L regardless of his effort. Charles' payoff is thus: with probability P w.e with probability 1- p L Charles has to pay a cost C, which increases with his effort. First, let us assume that Charles' utility is the expected payoff net of this cost: U(e) = pL + (1– p)we – c(e) Derive the first order condition with respect to e. b. How doesp affect Charles' effort e? C. How does L affect e?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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