2. Consider the standard moral hazard problem (two efforts, two outcomes) seen in class. Let eB>0. Let p denote the probability of G when effort is e and q the probability of G when effort is e. The utility for the agent is u(w,e)=logwc(e). Finally, the reservation utility for the agent is u=0. (a) Under which parameter values p,q,G,B, and c will the principal offer a contract that demands effort e in first best (i.e. effort observable, or no moral hazard)? (b) Under which parameter values p,q,G,B, and c will the principal offer a contract that induces effort e in second best (i.e. effort not observable, or moral hazard)? (c) Compare your findings from (a) and (b) and explain them. (d) (Challenging) Suppose that after the effort is exerted but before the returns are observed, the principal can offer a new contract. If the agent refuses the new contract, the one that was accepted remains in place. After carefully analysing how the whole scenario changes, check whether it is possible to observe a contract that induces e under moral hazard. You must prove your point. 2. Consider the standard moral hazard problem (two efforts, two outcomes) seen in class. Let eB>0. Let p denote the probability of G when effort is e and q the probability of G when effort is e. The utility for the agent is u(w,e)=logwc(e). Finally, the reservation utility for the agent is u=0. (a) Under which parameter values p,q,G,B, and c will the principal offer a contract that demands effort e in first best (i.e. effort observable, or no moral hazard)? (b) Under which parameter values p,q,G,B, and c will the principal offer a contract that induces effort e in second best (i.e. effort not observable, or moral hazard)? (c) Compare your findings from (a) and (b) and explain them. (d) (Challenging) Suppose that after the effort is exerted but before the returns are observed, the principal can offer a new contract. If the agent refuses the new contract, the one that was accepted remains in place. After carefully analysing how the whole scenario changes, check whether it is possible to observe a contract that induces e under moral hazard. You must prove your point