LABOR ECONOMICS
8th Edition
ISBN: 9781260004724
Author: BORJAS
Publisher: RENT MCG
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Question
Chapter 11, Problem 6P
To determine
Identify which firm will pay the greatest efficiency wage as well as the smallest efficiency wage.
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Consider three firms identical in all aspects (including the probability with which they discover a shirker), except that monitoring costs vary across the firms. Monitoring workers is very expensive at Firm A, less expensive at Firm B, and cheapest at Firm C. If all three firms pay efficiency wages to keep their workers from shirking, which firm will pay the greatest efficiency wage? Which firm will pay the smallest efficiency wage?
Suppose there are two types of workers. Type 1 workers have a marginal product of labor
(MPL) = 1. That is, if a firm hires an extra Type I worker, that worker will produce 1 extra unit
of output. Type II workers have a MPL = 2. The firm can sell each extra unit of output for P
= $12,000.
Firms are unable to identify whether or not a worker is Type I or Type Il unless the worker
sends a signal of what type they are. The signal that workers can send is a level of
education, e. The firm adopts the following hiring strategy:
If e >e* then offer the worker a wage rate equal to $24,000.
If e < e* then offer the worker a wage rate equal to $12,000.
The cost to Type I workers of getting education level e is $4000*e. The cost to Type II
workers of getting education level e is $2000*e. If the firm sets e* = 8, which of the following
statements is true?
O Type I workers will not get e*, but Type II workers will get e*, which means there is a separating
equilibrium.
O Neither type of workers will…
Two competing companies, A and B face the same unit cost of a product that is fixed and equal to 15
monetary units. The demand function for company A's product is Pa=65-2.5Qa and for B's product is Pb=60-2Qb.Calculate the Lerner index at the equilibrium position of each company. Comparing the index you found for company A with the index you found for company B what is found? If there is a difference between them, explain why it is due.
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