Answer with the theoretical content of advanced microeconomics.such as ：1. Hidden information: Adverse selection, screening, insurance markets, creditrationing.2. Signalling: Spence model, intuitive criterion, capital structure, cheap talk.3. Hidden information: Moral hazard and contracting, credit rationing.4. Institutional Design: Optimal income tax, auctions, contracting.5. Voting, Gibbard-Satterthwaite Theorem, VCG mechanism.6. Theory of social choice. 2. Consider the situation where shareholders hire a CEO to manage a firm. The CEO'sutility function is:u(w. e) = u(w)-v(e).where w is wage received, e is effort put in. Assume u' > 0, u" < 0. v' > 0. v">0. v(0) = 0. v'(0) = 0. Let the reservation utility of the manager be U. This ensuresthat effort level e > 0. The shareholders' profits are:B(x, w) = px-cx-W.where p is price of the good in the market, x are the sales and c is the constant marginalcost.(a)In the full information case, write down the problem for shareholderschoosing the optimal contract for the manager. What will be the optimal effort levelof the CEO in this case? Discuss the implications of the result.(b)If the effort of the CEO is not observable, what will be the maximizationproblem for the shareholders to determine the optimal contract. How is the optimalcontract, w, determined? What is the condition that needs to be satisfied for thedetermination of the optimal contract and effort level? Discuss how the principlesof this contract compare with other optimal contracts when there is moral hazard.

A utility function is a concept commonly used in economics and decision theory to represent…

Answered: 2. Consider the situation where…

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Answer with the theoretical content of advanced microeconomics.such as ：1. Hidden information: Adverse selection, screening, insurance markets, credit
rationing.
2. Signalling: Spence model, intuitive criterion, capital structure, cheap talk.
3. Hidden information: Moral hazard and contracting, credit rationing.
4. Institutional Design: Optimal income tax, auctions, contracting.
5. Voting, Gibbard-Satterthwaite Theorem, VCG mechanism.
6. Theory of social choice.

2. Consider the situation where shareholders hire a CEO to manage a firm. The CEO's
utility function is:
u(w. e) = u(w)-v(e).
where w is wage received, e is effort put in. Assume u' > 0, u" < 0. v' > 0. v">
0. v(0) = 0. v'(0) = 0. Let the reservation utility of the manager be U. This ensures
that effort level e > 0. The shareholders' profits are:
B(x, w) = px-cx-W.
where p is price of the good in the market, x are the sales and c is the constant marginal
cost.
(a)
In the full information case, write down the problem for shareholders
choosing the optimal contract for the manager. What will be the optimal effort level
of the CEO in this case? Discuss the implications of the result.
(b)
If the effort of the CEO is not observable, what will be the maximization
problem for the shareholders to determine the optimal contract. How is the optimal
contract, w, determined? What is the condition that needs to be satisfied for the
determination of the optimal contract and effort level? Discuss how the principles
of this contract compare with other optimal contracts when there is moral hazard.

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