2. Consider the following principal-agent problem. A principal wants to recruit an agent

to perform a task with two potential outcomes, a low outcome that will generate a

surplus of 25,000 for the principal, or a high outcome, that will generate a surplus of

50,000 for the principal. The probability of the outcome being low or high depends

on the effort that the agent exerts. There are in total 3 levels of effort: ?1,?2 and ?3.

The relationship between level of effort and probabilities of low or high outcome is

given in the Table below:

f25,000 $50,000 e1 0.25 0.75 e2 0.50 0.50 e3 0.75 0.25