B. The problem in the game defined in part A is that we are not adequately capturing the fact that firms and workers do not typically interact just once if a worker is hired by a firm. Suppose, then, that we instead think of the relationship between worker and firm as one that can potentially be repeated infinitely. Each day, the firm begins by offering a wage w to the worker; the worker accepts or rejects the offer, walking away with a market wage w* (and ending the relationship) if he rejects. If he accepts, the worker either exerts effort e or shirks, and the firm observes whether it ends the day with a payoff of 1x 2 w2 (which it gets for sure if the worker exerts effort but only with probability g , 1 if the worker shirks) or (2w) (which can happen only if the worker shirks). Everyone goes home at the end of the day and meets again the next day (knowing how all the previous days turned out).