(See Solution) Peter Higgins is a sales agent for XZY Company. He has an effort cost function of C = e 2 and a reservation wage of $1,500. His wage package
Question:
Peter Higgins is a sales agent for XZY Company. He has an effort cost function of C = e 2 and a reservation wage of $1,500. His wage package is W = 1,500 + 0.2Q where the CEO sets the incentive at 0.2 and Q = 200e. Q is the output. If the CEO increases the incentive from 0.2 to 0.25, what happens to the Peter's effort? Will profits rise or fall?
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