The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk-neutral, not risk-averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000.

A) Show that inducing high effort would require the firm to offer a compensation scheme with a negatibe base salary; that is,if the project fails, the manager pays the firm an amount stipulated in the scheme.

B) How might a negative base salary be implemented in reality?

C) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.