2. Consider an example of the Alchian and Demsetz theory of team production.

Suppose the individual production is q_i= 5 and the team production is Q = 5[ =1 ]. There are N = 8 members in the team who will share the total output equally.

The utility function in individual production is u_i = q_i - c() , where () = 0.25²/2 is the cost of effort.

In team production, the utility function of individual members is u_i = w_i - c(), where w_i = Q/N is the group incentive.

a)Compute the efficient effort (first best), and the effort that will be actually chosen with group incentives.