(a) Calculate the expected profits for Rachel on each case that reflects Emma's effort level. Which case does Rachel prefer? (b) Rachel's objective is to maximize the expected profit, subject to that Emma works for Rachel and Emma puts effort. However, effort level is not observable. Hence, Rachel needs to write a contract based on the observables. Let's say, Rachel pays Emma based on the outcome: when the profit is $0, when the profit is $2000, and when the profit is $3,000. Then Emma has three options: (i) Not to work for Rachel (ii) Work for Rachel without effort (iii) Work for Rachel with effort Find Emma's expected utility on each option. (c) Assuming Rachel wants Emma to put effort, her objective essentially becomes to find the lowest contingent payment scheme that is just enough for Emma to work for Rachel, and gives an incentive for Emma to put effort. Formally, we can write this as: min 0.1 +0.3xM +0.6 subject to and 0.1√ TL+0.3√/FM+0.6√TH-52 15, 0.1√√+0.3√√M+0.6√TH-5≥ 0.6√/TL+0.3√/M +0.1√/TH. (1) (2)
(a) Calculate the expected profits for Rachel on each case that reflects Emma's effort level. Which case does Rachel prefer? (b) Rachel's objective is to maximize the expected profit, subject to that Emma works for Rachel and Emma puts effort. However, effort level is not observable. Hence, Rachel needs to write a contract based on the observables. Let's say, Rachel pays Emma based on the outcome: when the profit is $0, when the profit is $2000, and when the profit is $3,000. Then Emma has three options: (i) Not to work for Rachel (ii) Work for Rachel without effort (iii) Work for Rachel with effort Find Emma's expected utility on each option. (c) Assuming Rachel wants Emma to put effort, her objective essentially becomes to find the lowest contingent payment scheme that is just enough for Emma to work for Rachel, and gives an incentive for Emma to put effort. Formally, we can write this as: min 0.1 +0.3xM +0.6 subject to and 0.1√ TL+0.3√/FM+0.6√TH-52 15, 0.1√√+0.3√√M+0.6√TH-5≥ 0.6√/TL+0.3√/M +0.1√/TH. (1) (2)
Chapter8: Game Theory
Section: Chapter Questions
Problem 8.12P
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Please just answer b,c,d
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