3. A firm is organized as a 2-person partnership. Each worker has a time endowment T=24. Time
can be spent either as leisure (x) or effort (e). The firm's profit function is y=3(e1+e2), where ei
denotes Partner i 's effort. Partner i 's utility function is given by u=xiyi, where yi denotes his
income.Suppose the firm in Problem 3 is organized as an owner and an employee. Both workers
still contribute to the production of the firm, but Worker 1 is the owner and Worker 2 the employee.
The owner offers the following contract to the employee: "You must exert units of effort, and you
will be paid y^. If you choose any other level of effort you will be paid nothing." The owner incurs a
cost of 12 for monitoring the employee's effort. What will be the value of e^ and y^ in the contract?
You can assume that half of the monitoring cost is subtracted from each worker's income. What
will be each person's leisure, effort, income and utility?.
3 A firm is organized as a 2person partnership Each worke.pdf
1. 3. A firm is organized as a 2-person partnership. Each worker has a time endowment T=24. Time
can be spent either as leisure (x) or effort (e). The firm's profit function is y=3(e1+e2), where ei
denotes Partner i 's effort. Partner i 's utility function is given by u=xiyi, where yi denotes his
income.Suppose the firm in Problem 3 is organized as an owner and an employee. Both workers
still contribute to the production of the firm, but Worker 1 is the owner and Worker 2 the employee.
The owner offers the following contract to the employee: "You must exert units of effort, and you
will be paid y^. If you choose any other level of effort you will be paid nothing." The owner incurs a
cost of 12 for monitoring the employee's effort. What will be the value of e^ and y^ in the contract?
You can assume that half of the monitoring cost is subtracted from each worker's income. What
will be each person's leisure, effort, income and utility?
