A&W recently hired Eric as a restaurant manager, whose effort level cannot be observed. The profits...

  

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A&W recently hired Eric as a restaurant manager, whose effort level cannot be observed. The profits of the restaurant (before paying to Eric) is as follows. Bad economy (Prob. = 0.4) Good economy (Prob. = 0.6) Low effort (a = 0) High effort (a = 1) $3,000 $7,000 $5,000 $9,000 a) Eric's utility Uw - C(a), where w= income, cost of low effort C(a=0) = 0 and C(a 1) = $600. What is the minimum x% of profits that A&W must offer (to Eric) to induce high efforts? (4 pts) b) Next consider A&W offers a fixed salary S = $800 plus bonus to Eric; bonus = B if revenue is $9,000 or more, and zero otherwise. Calculate the minimum value of B that A&W needs to offer to induce high effort (a =1). (4 pts) A&W recently hired Eric as a restaurant manager, whose effort level cannot be observed. The profits of the restaurant (before paying to Eric) is as follows. Bad economy (Prob. = 0.4) Good economy (Prob. = 0.6) Low effort (a = 0) High effort (a = 1) $3,000 $7,000 $5,000 $9,000 a) Eric's utility Uw - C(a), where w= income, cost of low effort C(a=0) = 0 and C(a 1) = $600. What is the minimum x% of profits that A&W must offer (to Eric) to induce high efforts? (4 pts) b) Next consider A&W offers a fixed salary S = $800 plus bonus to Eric; bonus = B if revenue is $9,000 or more, and zero otherwise. Calculate the minimum value of B that A&W needs to offer to induce high effort (a =1). (4 pts)