Consider a worker who works for your firm for two periods (each 20 years long). The worker can work at a high level of effort, producing $50,000 of output per period or at a low level of effort, producing $40,000 per period. The worker can obtain an alternative job that pays $40,000 per period for low effort. The worker views the cost of having to go from the low effort level to the high effort level as $8,000 per period (e.g., $18,000 per period at a high-effort job leaves the worker as well off as $10,000 per period at a low-effort job.)

a. What is the efficient effort level in each period? What if high effort levels only produced $45,000 in output per period?

b. Suppose the firm offered to pay workers $50,000 in period 1, $45,000 in period 2, but would fire any worker at the end of period 1 whose effort level turned out to be low. What level of effort would the worker provide in period 1?

c. Suppose the firm offered $10,000 during the first period and $80,000 during the second period. Again, anyone working at the low effort level is fired at the end of period 1. What level of effort does the worker provide in periods 1 and 2?

d. Suppose the worker is unexpectedly worth $75,000 to another firm in period 2 and he is offered a salary of $70,000. Does that change the answer to (c)? Should it? Any suggestions?