Reference no: EM133130795

You have a fish ball machine and you hire a worker to operate the machine. If the worker chooses to work hard, you will have $1500 profit from production. But the worker will have a negative utility from working hard, which we assume is equivalent to -$500. If the worker chooses not to work hard, you have $800 profit from production.

The production is unknown to you before you pay the salary. The salary for the worker is $1000. If you wish, you can always find an excuse to deduct $600 of the worker's salary. We assume both you and the worker know about the above information.

(a) Assume that you can observe whether the worker is working hard or not. Interpret the above interaction between you and the worker in terms of a game. Use Gambit to draw the game tree and analyse the game. Organize and present your answer clearly.

(b) If you cannot observe whether the worker is working hard or not, interpret the above interaction between you and the worker in terms of a game and analyse it.