The owner of a firm is risk neutral and needs to delegate the management of the firm to a manager. The expected utility function of the only available manager from the market is EU = 24x0.5x² + E(y) - 19202 where x is the amount of leisure consumed, y is the wage contract, E(y) is the expected monetary value of the wage contract, and the term -1920² reflects the utility cost of risk. Assume that the wage contract has the (linear) form y = OR + F, where 0 ≤ 0 ≤ 1 and F is a constant. Assume that the firm's profit before deducting the manager's pay is R = 16e + , where is a random variable with expected value zero and e = T-x is the level of effort supplied by the manager. The manager time endowment is T = 24 (which is the maximum amount of leisure consumption). The manager's best alternative employment yields an expected utility of Uº 320. Suppose that the level of effort supplied by the manager is not observable by the owner of the firm. =

The owner of a firm is risk neutral and needs to delegate the management of the firm to a manager. The expected utility function of the only available manager from the market is EU = 24x0.5x² + E(y) - 19202 where x is the amount of leisure consumed, y is the wage contract, E(y) is the expected monetary value of the wage contract, and the term -1920² reflects the utility cost of risk. Assume that the wage contract has the (linear) form y = OR + F, where 0 ≤ 0 ≤ 1 and F is a constant. Assume that the firm's profit before deducting the manager's pay is R = 16e + , where is a random variable with expected value zero and e = T-x is the level of effort supplied by the manager. The manager time endowment is T = 24 (which is the maximum amount of leisure consumption). The manager's best alternative employment yields an expected utility of Uº 320. Suppose that the level of effort supplied by the manager is not observable by the owner of the firm. =

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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