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pset5_s10 - Economics 217 Spring 2010 Problem Set 5(Answers...

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Economics 217 Spring 2010 Problem Set 5 (Answers to due in class Tuesday, April 6th, to be discussed questions 1-2 Friday, April 9th; ) please denote which recitation you plan to attend on Friday 1. Consider a scenario where a risk neutral firm writes a contract with a risk averse worker. The worker provides either low or high effort ( or ). There are only two values for realized /œ/ 62 output, a low value ( ) and a high value ( ). Illustrate graphically, in an Edgeworth box, a BB 0= scenario where if effort is contractable then the optimal contract specifies the worker provide high effort, but if effort is not contractable then the firms settles to contract for low effort. 2. Consider a writing an optimal insurance contract with a risk neutral insurance company risk averse driver . The driver has income resources of , but faces damages equal to if in an accident The C. insurance contract specifies a premium collected by the company each period, with a claim paid :D to the driver by the company in the event of an accident.
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