01. Sandy works door to door selling replacement windows in houses. Each day, Sandy decides how much effort to exert (eg, the number of hours and also how hard she works during those hours). She achieves greater success with greater effort, but sometimes luck has a stronger effect. Sandy finds that she has better luck on cold, windy days and worse luck when the local sports team loses. In the table below is information on the income to the firm from Sandy's sales: Poor Luck Low Effort (eo) High Effortle = 1) $5,000 $7,000 Good Luck $7.000 $13,000 Cost of effort to Sandy: c= $5000e The expected probability of good luck occurring - 0.25 and the expected probability of bad luck - 0.75 a) Why does the principal-agent problem arise in this scenario? b) If low effort is exerted, what is expected income?N c) If Sandy receives a fixed wage of $3000, what is the net surplus or income to Sandy (ie., net of the cost of each type of effort)? N What level of effort will Sandy exert? d) At what firm income will it not be clear whether Sandy is exerting high or low effort? e) Sandy finds a way to achieve a high effort outcome at a lower cost - the cost of high effort is now $2,500. At which of the following options will Sandy have an incentive to exert high effort? Which option will the firm offer Sandy (and that she would accept)? Why?N i) A guaranteed wage equal to 50 ii) A guaranteed wage equal to 55000 iii) A guaranteed wage equal to $10,000 iv) A wage equal to the income eamed, minus $4000 v) A wage equal to the income eamed, minus $1000 Q2. What is the problem with paying plant managers in multi-plant firms according to the level of output they produce