can I please have a response to the first question.

Q: what pourcentage of net income must the manager be offered so that he will accept the contract and work hard?

noise in net income, as fol e 650 with probability 25 Idion net income ith probability 0.9. Will your res han the percentage you recom. will receive d. Suppose that improvements to GAAP reduce the noise i cash flows are going to be $600, net income for the and $150 with probability 0.1. If cash flows are going to be the year is $650 with probability 0.1 and $150 with probabi mended percentage of net income be higher or lower than the mended in part a? Explain why. Calculations are not required 20. The sensitivity of a performance measure is the rate at which the expert performance measure increases as the manager works harder. Precision reciprocal of the variance of the performance measure. Required which the expected value of the or Precision, or noise, is the Refer to Example 9.6. Calculate the percentage increase in the expected value of reported net income (i.e., its sensitivity) as the manager's effort increases from shirk (a) to work hard (a.). Also calculate the precision of net income in this example, given that the man ager works hard. 21. You are engaged by the owner of a small firm to recommend a one-year compensation contract for the firm's top manager. She is concerned about cash flow and feels that a previous years, the manager may have been shirking. 28 Chapter 9 ou ascertain that if the manager works hard (a), the firm's ultimate cash flow from + vear operations will be one of $225 or $100 (before manager compensation) with obability 0.6, 0.4, respectively. If the manager shirks (a), cash flow will be $225 or 100 with probability 0.2, 0.8, respectively. Cash flow, however, will not be known until after the manager's one-year contract has expired. As an expert in GAAP, you know that if cash flow is going to be $225, net income for the year will be $300 with probability 0.7 and $50 with probability 0.3. If cash flow is going to be $100, net income will be $300 with probability 0.2 and $50 with probability 0.8. You recommend that the manager's contract be based on reported net income. You interview the manager and find that he is rational, risk averse with utility for money equal to the square root of the amount of money received, and effort averse with disutility of effort of 2.5 if he works hard and 1.8 if he shirks. The manager's reservation utility is 4. Required a. What percentage of net income must the manager be offered so that he will accept the contract and work hard? b. Suppose that all information given in the question is unchanged except that if the manager shirks, and cash flow is going to be $100, net income will be $300 with prob- ability 0.3 and $30 with probability 0.7. What contract would you then recommend? Show calculations and explain your contract choice. C. The owner is risk neutral, with utility equal to the dollar amount of the payoff, net of the manager's compensation. What is the agency cost of the contract in part a? Show calculations. in the nited States