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(40 points) Consider a boss who cannot observe the effort of their employee ( denoted r ). They only observe whether the project is a
(40 points) Consider a boss who cannot observe the effort of their employee ( denoted r ). They only observe whether the project is a success or a failure. A successful project produces a value of 2 for the boss. The boss picks a wage for success and a wage for failure then the employee picks their effort level in response. Neither wage can be less than 0 . The employee pays a cost of effort 2r2. (a) Find the utility function for each player (b) Find r as a function of ws and wf (c) Find equilibrium ws,wf, and r (d) What is the total equilibrium utility? (e) What would the efficient effort level be in terms of maximizing total utility
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