question is about asymmetric information about microeconomics !

The prot of the rm depends. on effort of the agent e and a random component [eoonomic conditions} e. The prot of the rm is J: = e + [156. The principal observes the prot, but does not know effort e. The only available information about economic shock for the principal is that E6 = CI. The principal maximizes his utility which is up (11', w} = EU: to), where w is wage paid to the agent. The agent maximizes u (w, e) = E(w) cfe), where cle} are costs of putting effort e. Suppose that C(e} = {3.5e2. {a} Suppose that the principal observes effort. Design the rst best contract. {b} Suppose now that effort is unobservable. Consider only linear contracts. Design the second best contract. Discuss the intuition of your results