Question: Consider the contract problem in Example 10.5. Suppose that when considering whether to take the contract or not, the worker tries to maximize the function

Consider the contract problem in Example 10.5. Suppose that when considering whether to take the contract or not, the worker tries to maximize the function U(b) + maxiε[h,l] Vi, where U(b) = b0.88, the value b is the base level of pay in the contract, and Vi is as given in equations 10.12 through 10.17. Consider that if the worker takes no contract, she will receive $0.
a. What is the minimum level of base pay the worker will accept for a contract with a high base pay and penalties for poor performance (so b = rh)? What are the resulting rl, rh?
b. What is the minimum level of base pay the worker will accept for a contract with low base pay and rewards for good performance (so b = rl)? What are the resulting rl, rh?
c. Suppose the firm can sell high-quality pizza for $10 and low-quality pizza for $7. Which contract will the firm offer in order to maximize their profits?

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