. 3. Consider a wage contract situation between a waiter (agent) and a restaurant owner (principal). The...

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3. Consider a wage contract situation between a waiter (agent) and a restaurant owner (principal). The number of guests to the restaurant depends in part on the waiters effort (e). For simplicity we assume that the waiter can put in two effort levels (H= high and L= low); if H revenue is RH 200, if L revenue is RL 100. e= H cost the agent 30, but e = L is costless to him. Profit to the owner is Tp = R(e) - w, where w is the fixed wage that they've agreed upon. The owner maxi- mize his profit, which is the same as minimizing the wage payment to - = 3. Consider a wage contract situation between a waiter (agent) and a restaurant owner (principal). The number of guests to the restaurant depends in part on the waiters effort (e). For simplicity we assume that the waiter can put in two effort levels (H= high and L= low); if H revenue is RH 200, if L revenue is RL 100. e= H cost the agent 30, but e = L is costless to him. Profit to the owner is Tp = R(e) - w, where w is the fixed wage that they've agreed upon. The owner maxi- mize his profit, which is the same as minimizing the wage payment to - =

Answer rating: 100% (QA)

First lets identify the participation and incentive constraints for the waiter agent a Participation Constraint PC The agent will accept the contract if his utility is at least as high as his reservat... View the full answer