Assume a firm located in a non-urban location pays a wage of $34/hour. However, it is assumed that there is a 20% chance that workers incur "switching costs" of $14/h. a) what is the expected wage? b) If a firm in an urban cluster wants to match the expected wage (and all else is equal), what should it pay assuming that urban switching cost is only $10 and the chance that switching is necessary is only 10%.

Assume a firm located in a non-urban location pays a wage of $34/hour. However, it is assumed that there is a 20% chance that workers incur "switching costs" of $14/h. a) what is the expected wage? b) If a firm in an urban cluster wants to match the expected wage (and all else is equal), what should it pay assuming that urban switching cost is only $10 and the chance that switching is necessary is only 10%.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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