You own a company that sells food to fans at hockey arenas all over Canada. Since you can't be at all of the arenas to sell the food yourself, you hire a person sell food in each arena. You will remain in Toronto to work at Scotiabank Arena, but your work in Toronto requires you to be present there most of the time, so you won't be able to observe the efforts of the people you hire to sell your company's food, but you will be able to observe the total sales they create. In general, the more effort exerted by a person selling food at an arena, the greater the sales they generate. To provide incentives for each person you have hired to sell your food, you decide to pay them according to the following contract: Income = a + b(Sales from food). In this case, "Sales from good" represents the total weekly sales (in dollars) the person generates in sales of food in the arena where they work for you. Income is also measured in dollars. Your goal is to use this contract to encourage your employees to use the Socially Efficient level of effort; you will need to discuss the ability to encourage this level of effort given the following issues. Use the theories that you learned in class to answer the following questions on the next two pages. 1. Ben and Megan are equally productive workers - an additional unit of effort generates the same equal amount of sales for both people - but they work in different places. (i) Ben works in Guelph, where the hockey team always plays 3 games per week (ii) Megan works in Sudbury where the hockey team is equally like to either play 2 games in a week or play 4 games in a week. Suppose that both Ben and Megan can make $500 per game if they choose the Socially Efficient level of effort. Describe the way in which the contract used for Ben and Megan may or may not - induce them to choose the Socially Efficient level of effort. 2. Now suppose that Ben is moved from Guelph to Peterborough. In Peterborough, Ben can - on average - still make the same weekly earnings as he did in Guelph. But in Peterborough, half of the games have fans from opposing teams that don't trust the food served in the Peterborough arena, and this results in a $250 reduction in sales, even if Ben chooses a Socially Efficient level of effort. But in the other half of the games, opposing fans cheer so hard for their team that they buy excessive amounts of food and drink that result in $250 higher-than-normal sales for Ben when he chooses the Socially Efficient level of effort. Comment on the way in which Ben's effort choice may or may not change when he moves from Guelph to Peterborough (and how it compares to the Socially Efficient level of effort), and the way in which the contract may or may not need to be adjusted compared to the one he was given in Guelph. 3. Now suppose Megan moves from Sudbury to Hamilton. The arena in Hamilton has a larger seating capacity than the arena in Sudbury, so with the same level of effort, she is able to generate $500 more in sales if there are no unexpected events. Within this context, consider the following issues: (a) If Hamilton's hockey team is equally like to either play 2 games in a week or play 4 games in a week, discuss whether or not Megan's move from Sudbury to Hamilton would require you to alter contract to encourage her to choose the Socially Efficient level of effort. (b) In one-quarter of Hamilton's games, almost all of the fans decide to leave the game early because the team is losing, and this results in sales that are $500 lower than they would be if the fans didn't leave the arena in this way. Discuss whether or not this fact would require you to alter Megan's contract (relative to the one you used with her when she was in Sudbury) to encourage her to choose the Socially Efficient level of effort, and whether it is possible to encourage her to choose the Socially Efficient level of effort at all. (Note: the team keeps records on the total number of fans who attend a game, but does not keep records on when fans leave a game). (c) If you want to encourage Megan to not only sell a lot of your food, but also participate as a fan of the Hamilton team by leading cheers during the game, discuss how well (or how poorly) your contract would encourage this behavior.