If Maries alternative utility is 5 units will she work for CC Inc?

Stefan has just been hired as a consultant to advise the campus construction company on how to cut i Show more Stefan has just been hired as a consultant to advise the campus construction company on how to cut its costs. The compensation scheme offered by CC Inc. is such that Stephans pay depends on his output i.e. on the total dollars saved by CC after following Stephans advice. Stephans output Q (in dollars) depends on the amount of effort he exerts E in a very simple way: Q = E. Stephans pay Y is a linear function of his output i.e. Y = a +bE. In other words Stephan gets paid a just for taking the assignment and in addition is paid b dollars for every dollar he saves CC Inc. Thus b is his commission rate. Stephans utility (U) depends on two things: income and effort. In particular U = Y C(E) where C(E) is the disutility of effort. For this question assume C(E) = E^3/3. Now assume that CC Inc. is hiring Marie as a consultant to computerize its office operations. Everything is the same in Maries situation as in Stephans except that her disutility of effort is different. Specifically C(E)=E2/10. d) How much effort willMarie exert if her commission rate is 20%? 100%? Does effort depend on a? e) Now suppose that Marie and CC are negotiating the terms of her contract (i.e. the level of a and b) before she starts. Before they settle on who gets exactly what in the end they agree that whatever contract they ultimately choose it must be efficient i.e. it must maximize the sum of CCs profits and Maries utility. If the contract is efficient what will be the level of b? Comment. f) Suppose now that to retain Marie CC Inc. must offer her a utility level of at least 1 unit (because this is what she can get working for another firm). What must a be? If Maries alternative utility is 5 units will she work for CC Inc? Show less

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