4. Absolute vs relative performance pay: You want to incentivize your sales manager reSponsible for Los Angeles. His sales Z1 2 el + X1 + Y depend on his effort 61 (which he controls), the state of the LA economy X1 and the state of the California economy Y (both of which are random and out of his control). You have a different sales manager for Orange county whose performance 22 = 62 + X2 + Y depend on the other manager's effort 62 (which is effectively known in equilibrium), the state of the Orange county economy X2 and Y as for the LA manager. All random variables X1, X2, Y are independent. On top of the LA manager's base wage as, you want to reward him for his absolute sales Z1 and/ or his relative sales compared to Orange county 21 Z2. (a) Which of these two options exposes the LA manager to less risk, and therefore requires the lower risk premium? (b) Now you consider also combinations of absolute sales, and relative sales, i.e. p.21 + (1 ,u)(Z1 22). What level ,u* minimizes the risk to the LA manager? What happens if X2 is much more uncertain than Y? Interpret your result