1. A firm writes a contract for an employee to work on a specific project. The employee's cost of effort is Cle) = e3 an

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1 A Firm Writes A Contract For An Employee To Work On A Specific Project The Employee S Cost Of Effort Is Cle E3 An 1 (51.82 KiB) Viewed 38 times

1. A firm writes a contract for an employee to work on a specific project. The employee's cost of effort is Cle) = e3 and the employee produces Qle) = e. The firm sells each unit of the good for 60. The employee's outside option is 100. (a) Suppose that the principal offers a piece rate of $12 for each unit manufactured. What is the optimal level of effort for the agent to put in [4 marks] (b) is the choice of effort in part (a) determined by an incentive constraint or by a participation constrainta [2 marks] (c) What piece rate must the firm offer so that the agent puts in effort e = 42 [4 marks) (d) Assume that the firm offers the piece rate that you found in part (c). Will the employee work for the firm? [6 marks] (e) Is this an incentive constraint or a participation constraint? [2 marks]