Consider the following competitive labour market. There are many identical firms that can hire workers. Each firm produces the same output using a constant returns to scale tech- nology and the price of output is £1. The market determines a wage level w for labour. Let O denote the number of units of output (equal to revenue) that a worker can produce. There is asymmetric information. Worker productivity levels are privately known, and are uni- formly distributed between 5 and 35. Let r(0) denote the reservation wage of an employee with productivity 0. More productive workers are more demanding, in the following sense. If 0 < 15, then r(0) = , but if 0 > 15 then r(0) = a) Derive the competitive equilibrium of this labour market. b) Suppose that, instead of a continuum of types, the labour force is comprised of equal amounts of only four types: 5, 10, 20, and 35. How would this change the results?
Consider the following competitive labour market. There are many identical firms that can hire workers. Each firm produces the same output using a constant returns to scale tech- nology and the price of output is £1. The market determines a wage level w for labour. Let O denote the number of units of output (equal to revenue) that a worker can produce. There is asymmetric information. Worker productivity levels are privately known, and are uni- formly distributed between 5 and 35. Let r(0) denote the reservation wage of an employee with productivity 0. More productive workers are more demanding, in the following sense. If 0 < 15, then r(0) = , but if 0 > 15 then r(0) = a) Derive the competitive equilibrium of this labour market. b) Suppose that, instead of a continuum of types, the labour force is comprised of equal amounts of only four types: 5, 10, 20, and 35. How would this change the results?
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter11: Labor Markets
Section: Chapter Questions
Problem 2SQP
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Transcribed Image Text:Consider the following competitive labour market. There are many identical firms that can
hire workers. Each firm produces the same output using a constant returns to scale tech-
nology and the price of output is £1. The market determines a wage level w for labour. Let
O denote the number of units of output (equal to revenue) that a worker can produce. There
is asymmetric information. Worker productivity levels are privately known, and are uni-
formly distributed between 5 and 35. Let r(0) denote the reservation wage of an employee
with productivity 0. More productive workers are more demanding, in the following sense.
If 0 < 15, then r(0) = , but if 0 > 15 then r(0) =
30
a) Derive the competitive equilibrium of this labour market.
b) Suppose that, instead of a continuum of types, the labour force is comprised of equal
amounts of only four types: 5, 10, 20, and 35. How would this change the results?
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