A. The manager of your company's pension fund is compensated based entirely on fund performance; he earned over $1.2 million last year. As a result, the fund is contemplating a proposal to cap the compensation of fund managers at $100,000. Provide an argument against the proposal.

B. Suppose the marginal cost of writing a contract of length L is MC = 40 + 3L. Find the optimal contract length when the marginal benefits of writing a contract is:

i MB(L) = 130.

ii MB(L) = 170.

iii What happens to the optimal contract length when the marginal benefits of writing a contract increases?