14. taxes and incentives Consider a setting where the manager's input can be L or H and the output can be x1=10,000 or x2=50,000. The manager's preferences are described in the usual fashion, i.e., (13.2). Let =.0001 along with cH=cL=5,000 and also set the manager's opportunity cost of working for this firm at M=0. The owner is risk neutral. The output probabilities are noted below and input H is desired throughout the exercise. (a) Determine and interpret an optimal contract. (b) Suppose the owner is subject to a 20% income tax (i.e., a tax equal to 20% of the net of xIx), while the manager faces a zero marginal tax rate. Determine and interpret an optimal contract. 13. Economic Foundations: Performance Evaluation (c) Repeat (b) above for the case where the owner is subject to a 20% income tax on income in excess of 20,000. (d) Repeat (c) above for the case cL=4,000. (e) Repeat (c) above for the case cL=0. 14. taxes and incentives Consider a setting where the manager's input can be L or H and the output can be x1=10,000 or x2=50,000. The manager's preferences are described in the usual fashion, i.e., (13.2). Let =.0001 along with cH=cL=5,000 and also set the manager's opportunity cost of working for this firm at M=0. The owner is risk neutral. The output probabilities are noted below and input H is desired throughout the exercise. (a) Determine and interpret an optimal contract. (b) Suppose the owner is subject to a 20% income tax (i.e., a tax equal to 20% of the net of xIx), while the manager faces a zero marginal tax rate. Determine and interpret an optimal contract. 13. Economic Foundations: Performance Evaluation (c) Repeat (b) above for the case where the owner is subject to a 20% income tax on income in excess of 20,000. (d) Repeat (c) above for the case cL=4,000. (e) Repeat (c) above for the case cL=0