You are engaged by the owner of a small firm to recommend a one-year compensation contract for the firms top manager. The owner is concerned about cash flow and feels that in previous years the manager may have been shirking. You ascertain that if the manager works hard (a1), the firms ultimate cash flow from current year operations will be either $338 or $142 (before manager compensation) with probability 0.6 or 0.4, respectively. If the manager shirks (a2), cash flow will be $338 or $142 with probability 0.2 or 0.8, respectively. Cash flow, however, will not be known until after the managers one-year contract has expired. As an expert in GAAP, you know that if cash flow will be $338, net income for the year will be $456 with probability 0.8 and $63 with probability 0.2. If cash flow will be $142, net income will be $456 with probability 0.1 and $63 with probability 0.9. You recommend that the managers contract be based on reported net income. You interview the manager and find that he is rational, risk-averse with utility for money equal to the square root of the amount of money received, and effort-averse with disutility of effort of 2.5 if he works hard and 1.8 if he shirks. The managers reservation utility is 4. Required a. What percentage of net income must the manager be offered so that he will accept the contract and work hard? b. The owner is risk-neutral, with utility equal to the dollar amount of the payoff, net of the managers compensation. Under the first best contract the owner expected utility is 217.35. What is the agency cost of the contract in part a? Show calculations.