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5) (15 points) The shareholders of PC (The Principal cooperation) are about to present a contract to a potential project manager. If she signs the contract, the manager has two choices: If she goofs off (exerts low effort), PC will gross 1.3 million TL for sure. If she works hard, there is an equal probability (1/2) that PC will gross 1.3 million TL or that it will gross 2.4 million TL. The shareholders cannot observe the manager's effort. That is, the manager's effort is not verifiable. The manager's utility is given by ln(w), where w is the value of salary package (in millions of TL) and is either zero (if she goofs off) or 0.4 million TL if she works hard. She could earn a salary of 1.2 million goofing off elsewhere if she were to decline the contract (Her outside option is 1.2 million TL). Assume the shareholders maximize expected net profit (which equals to gross profit minus the manager's salary). (a) (2 points) Draw the principal-agent game with expected payoffs. (b) (6 points) If PC paid the manager a fixed salary without bonus, how much would they pay, and what would the expected net profit be? Explain. (c) (6 points) What is the bonus contract that would induce the manager to work hard? What would the expected net profit be? Explain. (d) (1 points) In the light of above answers, what would you expect the shareholders to do? Explain. 5) (15 points) The shareholders of PC (The Principal cooperation) are about to present a contract to a potential project manager. If she signs the contract, the manager has two choices: If she goofs off (exerts low effort), PC will gross 1.3 million TL for sure. If she works hard, there is an equal probability (1/2) that PC will gross 1.3 million TL or that it will gross 2.4 million TL. The shareholders cannot observe the manager's effort. That is, the manager's effort is not verifiable. The manager's utility is given by ln(w), where w is the value of salary package (in millions of TL) and is either zero (if she goofs off) or 0.4 million TL if she works hard. She could earn a salary of 1.2 million goofing off elsewhere if she were to decline the contract (Her outside option is 1.2 million TL). Assume the shareholders maximize expected net profit (which equals to gross profit minus the manager's salary). (a) (2 points) Draw the principal-agent game with expected payoffs. (b) (6 points) If PC paid the manager a fixed salary without bonus, how much would they pay, and what would the expected net profit be? Explain. (c) (6 points) What is the bonus contract that would induce the manager to work hard? What would the expected net profit be? Explain. (d) (1 points) In the light of above answers, what would you expect the shareholders to do? Explain