Priscilla hires Arnie to manage her store. Arnie€™s effort is given in the left column of the table. Each cell shows the net profit to Priscilla (ignoring Arnie€™s cost of effort).

Arnie€™s personal cost of effort is 0 at low effort, 10 at medium effort, and 30 at high effort. It is equally likely that demand will be low or high. Arnie and Priscilla are risk- neutral. They consider two possible contracts: (1) fixed fee: Arnie receives a fixed wage of 10; and 2) profit sharing: Arnie receives 50% of the firm€™s net income but no wage.
a. What happens if they use the fixed- fee contract?
b. What happens if they use the profit- sharing contract?
c. Which contract does each prefer?

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Low Effort Medium Effort High Effort Low Demand 20 40 80 High Demand 40 80 100