Part 1 (10 marks) Martha owns a small business and is looking for a full-time manager to run his operation while she focuses on other responsibilities. Cash flows and net income of his firm are equal every year. Martha knows that if the manager works hard the company will generate income before managerial compensation of $250,000 with a 90% probability and income before managerial compensation of $150,000 with a 10% probability. On the other hand, if the manager shirks, income before managerial compensation will be $180,000 with a 20% probability and $100,000 with an 80% probability. Martha has interviewed James for the job and has ascertained that James has a square root utility function and has a disutility of effort of 45 if he works hard and a disutility of only 30 if he shirks. James's reservation utility is 180. Martha is considering offering James a compensation package of a fixed salary of $40,000 plus a 5% share of income after the manager's fixed salary. Required a) Explain why Martha is planning on offering James a share of the firm's income. As part of your answer, explain the agency relationship between Martha and James. What assumptions do we make about James? (4 marks) b) Comment on the sensitivity and precision of net income for Martha's business. No calculations are required ( 2 marks) c) Prepare an information table which represents the correlation between managerial effort and the firm's income before managerial compensation (2 marks) d) Determine whether James will accept the offer. If yes, would he work hard or shirk? Show all calculations. (2 marks)