Q1. Sandy works door to door selling replacement windows in houses. Each day, Sandy decides how much effort to exert (e.g., the number of hours and also how hard she works during those hours). She achieves greater success with greater effort, but sometimes luck has a stronger effect. Sandy finds that she has better luck on cold, windy days and worse luck when the local sports team loses. In the table below is information on the income to the firm from Sandy's sales: Poor Luck Good Luck Low Effort (e = 0) $5,000 $7,000 High Effort(e = 1) $7,000 $13,000 Cost of effort to Sandy: c = $5000e The expected probability of good luck occurring = 0.25 and the expected probability of bad luck = 0.75. a) Why does the principal-agent problem arise in this scenario? b) If low effort is exerted, what is expected income? N