Consider Ann, who has a project that would be worth $270 to her if performed by a hard worker and $70 if performed by a loafer, but that she cannot…

2. Consider Ann, who has a project that would be worth $270 to her if performed by a hard worker and $70 if performed by a loafer, but that she cannot do herself. She considers hiring Bob to perform the task. If hired, Bob’s utility is given by:

U(w,a) = w1/2 – a

where w is the wage Bob receives and a = 5 if bob works hard on the project and a = 0 if Bob loafs on the job. Furthermore, bob would rather sit at home where he obtains a utility of 9, if he can’t perform at least that well on the job.

A. What is the smallest wage Ann can offer that will get Bob to accept the job? At that wage will Bob work hard or loaf? Why? Will Ann hire Bob at this wage? Explain.

B. What is the smallest wage Ann can offer that will make it worth Bob’s while to accept the job and work hard? If she makes an unconditional offer to Bob at that wage is he likely to work hard? Explain.

C. What kind or contract might Ann offer that would end up with Bob being hired and Ann benefiting? What problems might there be enforcing the contract? Is there anything Ann might do to make the contract more enforceable?

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