Thursday, November 7, 2013

Sorry about the technology snafus today

Below is the graph from the Excel embedded in the PowerPoint.  It has the IC constraint explicit.  It is  the dashed upward sloping curve in black that is to the left of the main diagonal.  To satisfy the constraint you have to be on that curve or to the left of it.

Note that the IC constraint goes right through the cross point of the two indifference curves.   That means you don't really need all three curves to determine the optimal contract that induces high effort.  You only need the high effort indifference curve and one of the other two curves to determine the solution.

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