ECON4006 Final 2020

QUESTION 1        (15 points)

1. Discuss the principal-agent problem. (5 points)
2. A firm’s short run revenue function is given by $R=20e–0.5e^2$, and its profit function is given by $\Pi =R–w$, where “$e$” is the level of effort provided by a worker, and “$w$” is the wage rate of the worker. Suppose that the worker’s problem is to choose the level of “$e$” to maximize his benefit function $B=w–0.1e–0.075e^2$. Compute the optimal level of effort ($e$), wage ($w$), and profit ($\Pi$) if W = 0.25 R. (10 points)

Answer