Derive the optimal contract, Microeconomics

Assignment Help:

Assume that in the market there exist two types of workers where the principle cannot distinguish types. The two types only differ with respect to the disutility of effort. The disutility is either e^2 or 2e^2.

The utility function for worker one is

U^1(w,e) = w - e^2

and for worker two

U^2(w,e) = w - 2e^2

both types of workers have reservation utility zero

The probability that the worker is of type 1 is q = 1/2

An interested firm is risk neutral and has profits Π (w,e) = e - w

a) Which is the good high productive worker and which is the low productive worker

b) Derive the optimal contract for the firm if it had perfect info about the workers type. What effort levels are demanded and what wages paid. Calculate the firm's profits of both types were employed

c) Formulate the problem when an adverse problem is present

d) Derive the second best contract and calculate the firm's profits

e) Compare the cases of symmetric and assymetric info


Related Discussions:- Derive the optimal contract

Steps of the basic analytical framework in modern economics, What are the s...

What are the steps of the basic analytical framework in Modern Economics? Framework is very significant to master this fundamental analytical framework, particularly, these fiv

Profits, explain normal profits

explain normal profits

Economy, What is the impact of microeconomics on economy?

What is the impact of microeconomics on economy?

Explain three major barriers of developing contries, Explain three major ba...

Explain three major barriers to development experienced by developing countries. Well, the scope of possible answers here is, em, wide, to say the least. The issue is not to si

Indifference curve, Jane receives utility from days spent travelling on vac...

Jane receives utility from days spent travelling on vacation domestically(D) and days

What are the properties of cost function, What are the properties of cost f...

What are the properties of cost function? Properties of Cost Functions: Some similarities are here with consumer theory. Such similarities are actually exact while one compa

How have falling commodity prices affected many countries, How have falling...

How have falling commodity prices affected many developing countries? Definition of commodities; raw material like copper, iron and bauxite; and agricultural goods like rice an

Homework, Do not submit more than 1 file in the Canvas submission link. A f...

Do not submit more than 1 file in the Canvas submission link. A few years ago peanut farmers in India experienced a super-bumper crop due to favorable weather conditions. Initially

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd