1. The result that the optimal commission rate (b) is 100% and the optimal base pay (a) is less than or equal to zero depends on a number of assumptions. Explain how the optimal commission rate and base pay level changes if we introduce uncertainty in the production process and the agent is risk averse.

• Be sure to address the difference between when the level of uncertainty is known to the principal and when the level of uncertainty is unknown.

1. True or false, explain your answer. Assume that a job consists of many separate tasks and that it is not possible for the principal to observe an agent's performance in all of the tasks. Given that, it is more problematic for a principal or firm in such an environment if the tasks are considered complements to the agent and substitutes to the principal.

• Your answer should include a discussion of what would happen if the tasks were substitutes to the agent and complements to the principal.

1. Imagine you are a car salesperson with a bonus contract that pays you $7,000 in a month if you sell less than twelve (12) cars, and $8,000 if you sell twelve (12) or more.

a) If you expect to sell 10 (10) cars in each of the next 2 months, discuss how you can game this system to raise your average monthly pay from $7,000 to $7,500.

b) Why is this a problem for the car dealership owner?

1. A company's pay policies can affect both the motivation of a company's existing workers and the types of workers who eventually self-select into and out of the company. Describe how Safelite's change in pay polices from an hourly wage to a performance pay plan impacted its business and workforce.