2. Suppose you manage a factory with ten workers. Each worker's output is determined by the equation q = e. Output sells in the market for a price of 40. The firm has fixed cost equal to 800, and variable costs aside from labor are 8 per unit of output. Worker utility is U=w-e². a. Suppose you are paying workers a wage equal to bq. What is the profit- maximizing value of b? b. Suppose that the probability of worker error increases as the worker increases effort, and that worker error results in unusable output. Suppose that the probability of worker error is Pr[Error] = e/10. Then for worker effort level e, expected (usable) output is now determined by the equation E[q] = (1-Pr[Error]) x e. However, the problem is that you cannot detect errors until after the product is shipped to customers, meaning you pay workers for output before you know whether it is usable or not, and you have to refund your customers for unusable output. Demonstrate why you should not pay your workers the same piece rate you calculated in part a under these conditions.
2. Suppose you manage a factory with ten workers. Each worker's output is determined by the equation q = e. Output sells in the market for a price of 40. The firm has fixed cost equal to 800, and variable costs aside from labor are 8 per unit of output. Worker utility is U=w-e². a. Suppose you are paying workers a wage equal to bq. What is the profit- maximizing value of b? b. Suppose that the probability of worker error increases as the worker increases effort, and that worker error results in unusable output. Suppose that the probability of worker error is Pr[Error] = e/10. Then for worker effort level e, expected (usable) output is now determined by the equation E[q] = (1-Pr[Error]) x e. However, the problem is that you cannot detect errors until after the product is shipped to customers, meaning you pay workers for output before you know whether it is usable or not, and you have to refund your customers for unusable output. Demonstrate why you should not pay your workers the same piece rate you calculated in part a under these conditions.
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 9PA
Related questions
Question
urgently do this
![2.
Suppose you manage a factory with ten workers. Each worker's output is
determined by the equation q = e. Output sells in the market for a price of 40. The firm
has fixed cost equal to 800, and variable costs aside from labor are 8 per unit of output.
Worker utility is U =w- e.
a. Suppose you are paying workers a wage equal to bq. What is the profit-
maximizing value of b?
b. Suppose that the probability of worker error increases as the worker increases
effort, and that worker error results in unusable output. Suppose that the
probability of worker error is Pr[Error]= e/10. Then for worker effort level e,
expected (usable) output is now determined by the equation E[q] = (1-Pr[Error]) x
e. However, the problem is that you cannot detect errors until after the product is
shipped to customers, meaning you pay workers for output before you know
whether it is usable or not, and you have to refund your customers for unusable
output. Demonstrate why you should not pay your workers the same piece rate
you calculated in part a under these conditions.
c. Identify a compensation scheme that would result in higher profit to the factory
than w = bq, where b= the value you identified in part a. Why does your scheme
result in higher profit?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F60a45588-b3d5-467a-bb99-9d241fd19e90%2F2e4318e4-369a-4eee-9efb-65bc51d2141e%2Fv4sjbik_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2.
Suppose you manage a factory with ten workers. Each worker's output is
determined by the equation q = e. Output sells in the market for a price of 40. The firm
has fixed cost equal to 800, and variable costs aside from labor are 8 per unit of output.
Worker utility is U =w- e.
a. Suppose you are paying workers a wage equal to bq. What is the profit-
maximizing value of b?
b. Suppose that the probability of worker error increases as the worker increases
effort, and that worker error results in unusable output. Suppose that the
probability of worker error is Pr[Error]= e/10. Then for worker effort level e,
expected (usable) output is now determined by the equation E[q] = (1-Pr[Error]) x
e. However, the problem is that you cannot detect errors until after the product is
shipped to customers, meaning you pay workers for output before you know
whether it is usable or not, and you have to refund your customers for unusable
output. Demonstrate why you should not pay your workers the same piece rate
you calculated in part a under these conditions.
c. Identify a compensation scheme that would result in higher profit to the factory
than w = bq, where b= the value you identified in part a. Why does your scheme
result in higher profit?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 4 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Principles of Microeconomics](https://www.bartleby.com/isbn_cover_images/9781305156050/9781305156050_smallCoverImage.gif)
Principles of Microeconomics
Economics
ISBN:
9781305156050
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Principles of Economics, 7th Edition (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781285165875/9781285165875_smallCoverImage.gif)
Principles of Economics, 7th Edition (MindTap Cou…
Economics
ISBN:
9781285165875
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Microeconomics: Private and Public Choice (MindTa…](https://www.bartleby.com/isbn_cover_images/9781305506893/9781305506893_smallCoverImage.gif)
Microeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506893
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
![Principles of Microeconomics](https://www.bartleby.com/isbn_cover_images/9781305156050/9781305156050_smallCoverImage.gif)
Principles of Microeconomics
Economics
ISBN:
9781305156050
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Principles of Economics, 7th Edition (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781285165875/9781285165875_smallCoverImage.gif)
Principles of Economics, 7th Edition (MindTap Cou…
Economics
ISBN:
9781285165875
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Microeconomics: Private and Public Choice (MindTa…](https://www.bartleby.com/isbn_cover_images/9781305506893/9781305506893_smallCoverImage.gif)
Microeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506893
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
![Economics: Private and Public Choice (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781305506725/9781305506725_smallCoverImage.gif)
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning