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| Consider the questions faced by the board and the CEO in Problem 14. Assume that, as before, expending modest effort costs the CEO $300,000. But, assume now that expending high effort costs the CEO $750,000. a. Draw the extensive form for this game and find the equilibrium. Does the change in the cost of high effort alter the outcome? Explain. b. Demonstrate that the directors cannot improve their outcome by changing the base salary in the profit-sharing plan. c. What is the minimum share of the firm’s profit that will induce the CEO to expend high effort? |
