Section A: Contracts Answer ALL questions in this section. 1. A firm writes a contract for an employee to work on a spec
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Section A: Contracts Answer ALL questions in this section. 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 constrainte [2 marks] (c) What piece rate must the firm offer so that the agent puts in effort e = 4? [4 marks] (d) Assume that the firm offers the piece rate that you found in part (c). Will the employee work for the firmę [6 marks] (e) Is this an incentive constraint or a participation constraint? [2 marks] (f) Suppose that instead, the firm offers a fixed wage of 200 to produce 5 units. What are the firm's profits? Is the firm better off with this fixed wage or the piece rate found in (c)? [6 marks] (Total 24 Marks)