Suppose you are hiring a contractor to remodel your kitchen. One contractor offers a fixed price for the complete job, while a competing contractor offers a cost-plus offer where you are billed a multiple of the contractors cost of materials. The offers are summarized in the following table:

Contract TypeContract DescriptionFixed-PriceThe contractor will charge to $10,000 remodel the entire kitchen, which includes the materials and labor costs.Cost-PlusThe contractor will charge the sum of the labor and materials costs multiplied by 1.40.

Suppose that the contractor incurred $7,500 in labor and materials costs. Under the Fixed-Price contract, the profit to the contractor is ? 2,500, 3,500, 3,000 . Meanwhile, the profit to the contractor under the Cost-Plus contract is ?2,500, 3,500, 3,000 .

If the labor and material costs were to fall below $7,500, then the profit to contractor under the Fixed-Price contract will ? increase ,decrease or remain same . Meanwhile, the profit to the contractor under the Cost-Plus contract would ? increase ,decrease or remain same .

Under which contract type would a contractor have an incentive to use substandard materials and less competent labor?

a. Cost-Plus

b. Indeterminate

c. Fixed-Price