# 3 A firm is organized as a 2person partnership Each worke.pdf

20. Mar 2023
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### 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?