[25 marks] Describe the problem of 'moral hazard' in the context of principal-agent relationships. Explain why a variable wage scheme is better than a fixed wage scheme to overcome the problem of 'moral hazard' in this context. Illustrate workers' optimal effort provision under each wage scheme in two diagrams.

(b) [25 marks] In the principal-agent analysis, the output is a function of agent's effort and a random component . Explain the role of the random component