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Amy manages an ice cream parlor owned by Paul, who cannot observe Amy's effort. Normal effort has no cost to Amy but high effort costs
Amy manages an ice cream parlor owned by Paul, who cannot observe Amy's effort. Normal effort has no cost to Amy but high effort costs her 60. Good and bad luck each have 50% probability. Amy and Paul are risk neutral. Each cell shows the daily profit of the firm (without subtracting Amy's cost of effort). Bad Luck Good Luck Normal Effort 100 300 High Effort 300 500 a. It is efficient for Amy to provide high effort. b. Amy will provide high effort if she gets a fixed wage of 80. c. Amy will provide high effort if she gets a 40% profit share instead of salary. (1. Paul would prefer to offer a fixed wage of 80 rather a 40% profit share. e. a. and c
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