A firm is hiring an MBA graduate to work in the marketing department. The graduate can pick only one of two effort levels: a "low" effort level of zero, or a "high" effort level of 3. If the graduate exerts low effort, the firm sells 100 units of output with probability .75, and 500 units of output with probability .25. If he exerts high effort, the firm sells 100 units of output with probability .25, and 500 units with probability .75. The graduate's utility function is given by: U = sqrt(W)- a, where W is his compensation and a is his effort level. The graduate's alternative utility (what we would get if he did not work for this firm)is 15.5.
i)What are the firm's expected sales if the graduate chooses low effort? If he chooses high effort?
ii)Suppose we can write an employment contract that forces the graduate to choose low effort. Is there such a contract that both the graduate and firm will prefer to not working together?
iii)Suppose we can write an employment contract that forces the graduate to choose high effort. Is there such a contract that both the agent and firm will prefer to not working together? What is the highest profit the firm can earn and still induce the agent to participate in such a contract?

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The Answer of A firm is hiring an MBA graduate to work in the marketing department. The graduate can pick only one of two effort levels: a "low" effort level of zero, or a "high" effort level of 3. If the graduate exerts low effort, the firm sells 100 units of output with probability .75, and 500 units of output with probability .25. If he exerts high effort, the firm sells 100 units of output with probability .25, and 500 units with probability .75. The graduate's utility function is given by: U = sqrt(W)- a, where W is his compensation and a is his effort level. The graduate's alternative utility (what we would get if he did not work for this firm)is 15.5.
i)What are the firm's expected sales if the graduate chooses low effort? If he chooses high effort?
ii)Suppose we can write an employment contract that forces the graduate to choose low effort. Is there such a contract that both the graduate and firm will prefer to not working together?
iii)Suppose we can write an employment contract that forces the graduate to choose high effort. Is there such a contract that both the agent and firm will prefer to not working together? What is the highest profit the firm can earn and still induce the agent to participate in such a contract?

A Firm Is Hiring an MBA Graduate to Work in the Marketing