Consider that an investor invests $1,000 to an entrepreneur who has a project, and the payoff...

 

Transcribed Image Text:

Consider that an investor invests $1,000 to an entrepreneur who has a project, and the payoff is given as the project return minus her/his effort level minus the repayment to investor. S/he decides either zero effort or an integer effort level between 1200 and 4000. If the project achieves success, it yields $10,000. Otherwise the return is zero. The entrepreneur has to pay back $ 2000 to the investor only when the project succeeds. Let the probability that the project succeeds by making efforts be p(e) = e/4000 between 1200 and 4000, and 30% %3D for zero effort, then answer the following questions: (a) Let the effort level for the entrepreneur be e. Then, how much is the entrepreneur's expected (net) profit? (b) How much is the entrepreneur's expected (net) profit when the entrepreneur chooses zero effort. (c) Answer the entrepreneur's incentive compatibility condition based on the above two questions.? Consider that an investor invests $1,000 to an entrepreneur who has a project, and the payoff is given as the project return minus her/his effort level minus the repayment to investor. S/he decides either zero effort or an integer effort level between 1200 and 4000. If the project achieves success, it yields $10,000. Otherwise the return is zero. The entrepreneur has to pay back $ 2000 to the investor only when the project succeeds. Let the probability that the project succeeds by making efforts be p(e) = e/4000 between 1200 and 4000, and 30% %3D for zero effort, then answer the following questions: (a) Let the effort level for the entrepreneur be e. Then, how much is the entrepreneur's expected (net) profit? (b) How much is the entrepreneur's expected (net) profit when the entrepreneur chooses zero effort. (c) Answer the entrepreneur's incentive compatibility condition based on the above two questions.?