Macro economics

Consider the relationship between a principal and its agents, agents are divided into highly productive H type and low productive L type. When an agent performs work for x hours, he/she gets a reward w for it. However, the agents have no place to work other than this principal. H type agents produces 8√x results from x hours of work, while L type agents produces 4√x results. Corporate profit is the result of the agents’ result minus the remuneration w, and the utility of the agent is defined by u = w – x.

Problem;

The principal does not know the type of agents but knows that the ratio of H type is 1/3 and the ratio of L type is 2/3, find the combinations or contracts (x, w) that enable the screening of agents but at the same time, maximises the profit of the principal.

This question has been answered.

Get Answer