. Old MacDonald produces hay. He has a single employee, Jack. If Jack exerts x amount of effort he can produce f(x)=8x bales of hay. Each bale of hay sells for $1. Jacks utility function is U=C-x^2/2. Old MacDonald cannot observe the amount of hours Jack works on the farm. a)What is the efficient number of bales of hay for Jack to cut? b)Suppose that Jack would receive $2 per hour for passing out leaflets for 8 hours in the city, an activity that involves no effort whatsoever. MacDonald would like Jack to work on the farm. Suppose that MacDonald charges a fixed fee per day of F to Jack to work on the farm and Jack obtains the residual from selling hay. Would Jack choose the efficient amount of effort if he works on the farm? What would be the value of F that maximizes MacDonalds profits? c)Suppose MacDonald is considering an alternative scheme in which Jack works on the farm and shares half of the revenues with MacDonald. This is a form of sharecropping. Would Jack choose the efficient effort in this scheme?

intermediate microeconomics