1. The landlord maximizes his income. Specifically, the landlord solves the following program:

max_h,leH+(1e)0(eh+(1e)l)

such that

e argmax_e^e^h+(1e^)l1/2ce^²

eh+(1e)l1/2 ce²0

What is the second constraint:eh+(1e)l1/2ce²0

called?

a. Tenant's PC

b. Landlord's Participation Constraint (PC)

c. Tenant's IC constraint

d. Landlord's Incentive Compatibility (IC) constraint

Q. Assume that the second constraint holds with a equality (if it did not, the landlord loses income). Note that you have already solved the first constraint(e^T=h-l/c)

argmax_e^e^h+(1e^)l1/2ce^²

Now, solve the landlord's optimization problem given the two constraints. What is the level ofhl

chosen by the landlord? Your answer should be a function ofH,c

only.

[Hint: Plug in the constraints into the landlord's profit function and rewrite the maximization problem as the landlord choosing(hl) instead ofh andlseparately]