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8. A salesman's probability of selling an encyclopedia is p (1/2, 1) if he exerts effort and is equal to 1/2 otherwise. His cost of
8. A salesman's probability of selling an encyclopedia is p (1/2, 1) if he exerts effort and is equal to 1/2 otherwise. His cost of exerting effort is 20, and his reservation utility is = 50. A sale generates a revenue of 200 euros to the company. Both the salesman and the company are risk-neutral. X. Describe the contract that maximizes the company's profits if it can monitor the saleman (can observe whether he exerts effort or not) ii. Consider that the company cannot monitor the salesman, but can pay him wages contingent on success. Calculate the optimal contract for each p (1/2, 1) considering two distinct cases. One in which the salesman has limited liability towards the company, meaning that he cannot receive a negative wage, and another in which he does not. What is the difference between these two cases. ili. Now consider that the salesman is risk averse and von Neumann-Morgenstern utility function is u (w) = 20 In w. Determine the optimal contract for p = 4/5
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