It is instructed to think of the monitoring level as a variable, not fixed. It is a four part question. On top of this, in the lecture this is the information about "bad project 2" that we received.

• good project yields no private benefifit and has probability of success pH.
• bad project 1 yields low private benefifit,b, and has probability of success pL.
• bad project 2 yields high private benefifit,B, and has probability of success pL.
• a monitor can reduce the private benefifit from B to b
• If the monitor incurs effort cost c, he is able to identify the bad project 2 with large private benefifit, and prevent the entrepreneur from selecting it.
• b < B

Other information that is required