A firm owns expensive machinery to be operated by a worker. If the worker operates very carefully (works hard, e=1) the value of the machinery (net of depreciation) at the end of the year would be $100k with probability %90, and $40k with the remaining probability %10. If the worker works carelessly (shirks, e=0) the probabilities are %50 and %50 respectively. The worker experiences a disutility from having to work carefully that is worth $10k. Working carelessly has no disutility cost for him. The worker also has an outside option of quitting and working for another company that gives him $50k, without any disutility cost of carefulness whatsoever. The worker is risk neutral, and cares about the expected income she will make minus the disutility cost $10k if she is working carefully. The firm is also risk neutral, and cares about the expected value of the machinery minus the worker's compensation payments. (a) If the firm can observe whether the worker is working carefully or not and contract upon it, how much should the firm offer the worker so that she stays with the firm (and works carelessly)? Stay with the firm and work hard