2. A rm is going to hire a new manager. Assume that there is a wide set of homogeneous managers with Bernoulli utility function u=w0'5-g(e), where w represents the wage rate, e the manager's effort, and g(e) the cost of effort. The effort level can either be high or low. The cost of a high effort level is 10, and the cost of a low effort level is 1. Assume that the managers' reservation utility is zero. The profit level depends on the effort level chosen by the manager. The following table represents the probabilities of each profit level ( before paying the manager's wage) Prot 40-0 IUD 500 mm Highm 1.... sea 2.1 What is the optimal contract when effort is observable? 2.2 What is the optimal contract when effort is not observable (assume that the wage rate can never be negative) 2.3 Calculate the range of values for the high effort level, such that the firm chooses to implement that effort level (assume that the wage rate can never be negative). Reference: Exercise based on Section 7.4. "Optimal Contracts" of the book "GAM ES AND INFORMATION, FOURTH EDITION An Introduction to Game Theory" by Eric Rasmusen