Question: An employee has a utility function given by er+1 U(w, e) = w - Y+1' where y > 0, where w is total labor

An employee has a utility function given by er+1 U(w, e) =

An employee has a utility function given by er+1 U(w, e) = w - Y+1' where y > 0, where w is total labor earnings and e is effort expended on the job. The output of the worker is given by y = e. The price of each unit of output sold by the firm is p. If p = 20 and y = 1, determine the optimal contract that the firm offers the worker. Limit your attention to contracts of the form w = wo+By, where wo is a fixed wage payment (independent of the worker's output) and 8 is the piece rate. For this problem, will the firm offer a positive fixed-wage wo? Why? If the firm only offers a piece rate, which value should it select?

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