(25 marks) The owner of Falcons would like to make sure that the team wins the championship this year. If the Falcons win the title, the owner will earn $20 million, and if they lose, the owner will make a loss of $5 million. The probability of winning depends on the effort of the head coach, Tom Hawkins. The likelihood of winning is 40% if Tom Hawkins puts in no effort and 70% if Tom Hawkins puts in effort. Providing effort is costly. Tom Hawkins gets a disutility of $5 million from putting in effort and sets no disutility if he provides no effort. Assume that Tom Hawkins' outside option gives a payoff of $2 million. (a) (8 marks) Suppose that the owner can observe the effort level exerted by Tom Hawkins. How much will the owner need to pay Tom Hawkins so that he exerts effort? Will the owner like to offer a contract where Tom Hawkins provides effort? (b) (10 marks) Now suppose that the owner cannot observe how much effort Tom Hawkins exerts. Assume that the owner offers a wage scheme consisting of a base salary, w, as well as a bonus, b, which only gets paid if the Falcons win the championship. Both the base salary and the bonus cannot be negative: w0 and b0. Find a contract that gives incentives for effort provision. (c) (7 marks) Will the owner offer this contract, or will he be better off with a contract where no effort provision is incentivized? (25 marks) The owner of Falcons would like to make sure that the team wins the championship this year. If the Falcons win the title, the owner will earn $20 million, and if they lose, the owner will make a loss of $5 million. The probability of winning depends on the effort of the head coach, Tom Hawkins. The likelihood of winning is 40% if Tom Hawkins puts in no effort and 70% if Tom Hawkins puts in effort. Providing effort is costly. Tom Hawkins gets a disutility of $5 million from putting in effort and sets no disutility if he provides no effort. Assume that Tom Hawkins' outside option gives a payoff of $2 million. (a) (8 marks) Suppose that the owner can observe the effort level exerted by Tom Hawkins. How much will the owner need to pay Tom Hawkins so that he exerts effort? Will the owner like to offer a contract where Tom Hawkins provides effort? (b) (10 marks) Now suppose that the owner cannot observe how much effort Tom Hawkins exerts. Assume that the owner offers a wage scheme consisting of a base salary, w, as well as a bonus, b, which only gets paid if the Falcons win the championship. Both the base salary and the bonus cannot be negative: w0 and b0. Find a contract that gives incentives for effort provision. (c) (7 marks) Will the owner offer this contract, or will he be better off with a contract where no effort provision is incentivized