The purpose of this class problem is to illustrate how important risk sharing is in a specific principal-agent context; specifically, the owner/manager relationship.  Not surprisingly, we find that a compensation contract that includes incentive compensation (in this case, in the form of bonuses based on firm profitability) is incentive-compatible in the sense that such a contract motivates the manager's to expend the level of effort required in order to maximize the profitability of the firm.