Suppose c(e) = 1 /3^e . If the owner can observe the worker's effort e and pay based on that, what effort level will the owner require?

A. e*= 1. B. e* = 2. C. e* = 8. D. e *= 12.

17. Let g = e + (which the owner can observe) and suppose the owner pays a salary of s = a + bg, where a and b are constants. The worker's effort level will equal the first-best level if

A. a = 0. B. a = 1. C. b = 0. D. b = 1.

18. The worker's expected utility is of the form Eu = E[s] A 2 V ar[s] c(e), where A > 0. This means A. the worker is risk-neutral. B. if s is fixed (has no variance), the worker will choose the first-best level of effort. C. the owner can 'sell the firm' to the worker by paying s = (c(e ) e ) + g (where e is the first-best effort) and the worker will accept it. D. the worker needs to be compensated extra if their salary s has randomnes