(Harder) Can you come up with gross profit levels II and II such that for the unobservable effort case the principal will implement e=1 (that is will offer the optimal wage schedule for e=1) if there is no limited liability, but will implement e=0 when there is limited liability. For the values of gross profit levels you calculate, which effort level is socially optimal (which effort level would be implemented when effort is observable). Based on your answer, is it possible to have lower social surplus/welfare because of asymmetric information?

(Harder) Can you come up with gross profit levels II and II such that for the unobservable effort case the principal will implement e=1 (that is will offer the optimal wage schedule for e=1) if there is no limited liability, but will implement e=0 when there is limited liability. For the values of gross profit levels you calculate, which effort level is socially optimal (which effort level would be implemented when effort is observable). Based on your answer, is it possible to have lower social surplus/welfare because of asymmetric information?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Isocost and Isoprofit Curve Analysis

An isocost curve in the production theory that is a crucial part of economics depicts different combinations of factor inputs at a given market cost. In other words, this shows all the combinations of production factors that cost the same for the firm to employ. Usually, this can be depicted as a downward sloping straight line when the firms act as the price-takers in the factor markets. The slope of this mainly depicts the relative prices of different production factors.

Question

(Harder) Can you come up with gross profit levels I and II such that for the
unobservable effort case the principal will implement e=1 (that is will offer the
optimal wage schedule for e=1) if there is no limited liability, but will implement e=0
when there is limited liability. For the values of gross profit levels you calculate,
which effort level is socially optimal (which effort level would be implemented when
effort is observable). Based on your answer, is it possible to have lower social
surplus/welfare because of asymmetric information?

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