What is the optimal amount of effort for agent one

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Reference no: EM133300607

Topic: John is a manager at a small English Bakery that sells gooseberry pies. Currently, each of his three employees, agent 1, agent 2 and agent 3, work independently on full commission. Assume to begin with that individual effort is observable, and that total output is given by Q = 10(E1 + E2 + E2). Agents are paid a salary of a + Qi (where Q1 = 10 E1 = output from agent 1; Q2 = 10E2 = output from agent 2 = 10E2 and so on). Each agent has an alternative utility level of 10 units, and the cost of effort C(E) = E2 .

Question 1: Given this compensation scheme, what is the (privately) optimal amount of effort for agent 1?

Question 2: How many pies does she make?

Question 3: What must the fixed portion of agent 1's income (a) be for her utility on this job to exactly equal 10?

Question 4: What is agent 1's total income in the above situation?

Question 5: Check to see that agent 1's utility level is in fact 10 when she gets this total income and chooses her effort optimally.

Question 6: What is the profit for the firm that is produced by agent 1? Are your answers the same for agents 2 and 3?

Question 7: Find the firm's total profit from all three workers combined.

Reference no: EM133300607

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