What is the expected income of the principal gained


Discuss the below:

Q: Suppose an agent has two feasible actions, A = {y1; y2} and A0 = {z1; z2}; the corresponding probabili-ties are defined by the matrix

                p 1 - p

P =

              1 - p p

where 1/2 p ≤ 1. The costs incurred by choosing the first and the second actions constitute c1 and c2, respectively (c2 ≥ c1). The expected income of the principal gained by the first (second) action makes H1 (H2, respectively). Evaluate an optimal contract.

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