Question 4:

a.
There is no incentive for the worker to provide an effort that exceeds 1, as the wage received by
the worker will be 2 if the worker provides one unit of effort but will not increase if the worker
provides more effort. The profit for the firm will be revenue minus the wages paid to the worker:

In this principal-agent relationship there is no incentive for the worker to increase his or her
effort as the wage is not related to the revenues of the firm.
b.

c.