A Executive Can Either Slack (Effort E = 0)or Work

Multiple Choice

A executive can either slack (effort e = 0) or work hard (e = 1) on behalf of shareholders. If she slacks,the firm earns a gross return of 1,000 for sure. If she works hard,there is an even chance of the gross return being 10,000 or 80,000. Her overall utility equals her utility from wage income (of the form w^1/2,where w is the wage) minus the disutility of work (simply d) ,or in other words U = w^1/2 -d. If she slacks,she experiences no disutility of work (d = 0) but if she works hard,the disutility of work is d = 50. Assume that U = 0 in her next best available job. What is the optimal wage contract that shareholders would offer if they can observe the effort of the executive?

A) A flat wage w = 0 and no requirement to work hard.
B) A flat wage w = 50 and a requirement to work hard.
C) A flat wage w = 2,500 and a requirement to work hard.
D) A share of 50% of the profits and a requirement to work hard.