Information for questions 01 to 05: Priscilla hires Adam to manage her store. The left column of the table below shows Adam's possible effort levels-low, medium, and high. Adam's personal disutility in terms of dollars depends on his effort level is shown in the second column. The two right columns show the different profits to Priscilla (before paying Adam's salary and ignoring his cost of effort) under Low- and High-demand conditions. Effort Level Low Medium Adam's Cost of Effort Low Demand Profit High Demand Profit $0 $20 $40 High $10 $30 $40 $80 $80 $100 It is equally likely that demand will be High or Low: chances are 50/50, regardless of how much effort Adam exerts. They consider two possible contracts: i. Fixed Wage: Adam receives a fixed wage of $10 ii. Profit Sharing: Adam receives 50% of the store's profits but no wage. Assume, to simplify matters, that both Adam and Priscilla are risk neutral. Question 01 Calculate the net expected payoffs for Adam and Priscilla under each possible contract offered by Priscilla and effort level exerted by Adam. Which of the following alternatives is correct? (a) For Adam, the fixed-wage net payoffs are 10 for any effort level (low, medium, or high) (b) For Adam, the profit-sharing net payoffs are 15 if low effort, 20 if medium, and 15 if high (c) For Priscilla, the fixed-wage net payoffs are 15 if low effort, 30 if medium, and 45 if high (d) For Priscilla, the profit-sharing net payoffs are 20 if low effort, 50 If medium, and 80 if high Question 02 Use the payoffs you calculated in question 01 to illustrate this situation as a simultaneous (normal form) game in which Adam chooses his effort level, and Priscilla chooses the contract at the same time. What Is the Nash Equilibrium (or equilibria) In this game? (a) Adam chooses Low Effort, Priscilla chooses Fixed Wage (b) Adam chooses Medium Effort, Priscilla chooses Fixed Wage (c) Adam chooses Medium Effort, Priscilla chooses Profit Sharing (d) Adam chooses High Effort, Priscilla chooses Fixed Wage Question 03 Now use the payoffs you calculated in question 01 to illustrate this situation as a sequential (tree form) game in which Priscilla first offers a contract type (fixed wage or profit-sharing), then Adam chooses his effort level (low, medium, or high). What is the equilibrium in this game? (a) Priscilla chooses Fixed Wage, Adam chooses Low Effort (b) Priscilla chooses Fixed Wage, Adam chooses Medium Effort (c) Priscilla chooses Profit-Sharing, Adam chooses Medium Effort (d) Priscilla chooses Fixed Wage, Adam chooses High Effort Question 04 What would happen if Adam could choose both the contract type and his effort level? (a) Adam would choose the Fixed Wage contract and exert Low Effort (b) Adam would choose the Fixed Wage contract and exert Medium Effort (c) Adam would choose the Profit-Sharing contract and exert Medium Effort (d) Adam would choose the Profit-Sharing contract and exert High Effort Question 05 Would your answer to questions 02, 03, and 04 change If Adam were risk-averse? (a) In question 02, the answer could change depending on Adam's degree of risk-averseness (b) in question 03, the answer would definitely change if Adam were risk-averse (c) in question 04, the answer would definitely change if Adam were risk-averse (d) in question 04, the answer could change depending on Adam's degree of risk-averseness