Erica is an employee of big bank weekly output

Erica is an employee of Big Bank. Her effort (e) contributes to Big Bank's weekly output (Q): Q = 60e + / Where e is the number of hours of effort she applies each week. / ~ (0, 02 ) is beyond Erica's control. Utility from work is given by: U(w, e) = w- e2 Erica has a reservation wage of $1000 per week, which is the wage she could get elsewhere in a job that requires no effort. (a) Assume Erica's effort is observable at no cost. Under the optimal contract, what wage w* would the firm offer and how many hours must Erica work? [3 marks] (b) Assume Erica's effort is unobservable and she is risk neutral. Suppose the firm offers Erica a wage of: W = 100 + 0.5Q Where Q is the firm's output. (i) What effort would Erica choose? [2 marks] (ii) The firm decides to review Erica's contract, maintaining her wage in the form: W = Wo + B