economics problem

Suppose you are the owner of a firm, looking for a manager to undertake a project. The outcome of the project is uncertain, and the probability of success depends on the quality of the manager's effort. If successful, the project will earn 600.000. The probability of success is 60% (0.6) if the manager's effort is of routine quality but rises to 80% (0.8) if it is of high quality. Effort is costly and you need to pay 100.000 the manager for a routine quality effort or 150.000 for high quality effort. (a) Suppose effort is perfectly observable. Is it worthwhile for the owner to spend 1550.000 extra and get high quality effort? [10 marks] Suppose effort is not directly observable by the owner. Consider the following alternative contract. The manager's compensation is s + b, where s 2 U is a base salary and b a bonus that is paid only if the project succeeds. (b) When is it worthwhile for the manager to put high quality effort under this compensation package? [15 marks] (c) Assume all bargaining power is to the owner. Which contract (5*, b') would maximize the owner's prot and guarantee high quality effort by the manager? [15 marks] (d) Is (5*,b') in point (c) worthwhile to the owner? What about if the project were returning only 400.000 if successful? [10 marks]