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okay hello and welcome everyone so I am going to continue to walk through the problems from the practice review exercises these are going over the moral hazard incentive contract type questions so suppose you run a shop producing gizmos suppose the worker has a cost of effort its gonna be given by one half effort squared - for effort plus 12 we have a workers utility which is just the wage - their psychic effort cost worker has an alternative employment option worth $24 total gizmo production is just going to be effort directly into output you can sell each gizmo for sixteen so but was the only pay fix hourly wage what level level of effort where the worker set how much miss you pays that they agreed to work for you whats your profits the full incentive contract is of the form fixed plus variable find a and B does either the firm of the worker have a preference between the two contracts explained well you should be able to answer this immediately right were gonna set up the workers
