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7. A firm's can sell higher quality products for more: P = 10 + 20 X, where X is the quality of the product sold. Workers hired by the firm make a product, the quality of which depends on effort and luck X=e+E, where X = Quality, e = effort, and = E(=)=0.. Luck .so average quality depends on effort

7. A firm's can sell higher quality products for more: P = 10 + 20 X, where X is the quality of the product sold. Workers hired by the firm make a product, the quality of which depends on effort and luck X=e+E, where X = Quality, e = effort, and = E(=)=0.. Luck .so average quality depends on effort

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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7. A firm's can sell higher quality products for more: P = 10 + 20 X, where X is the quality of the product sold. Workers hired by the firm make a product, the quality of which depends on effort and luck X=e+E, where X = Quality, e = effort, and e Luck E(=) = 0. .so average quality depends on effort Wages are contingent on outcome (X) where w 10+ 8 X and the cost of effort C(e) = e² with e≥0 Determine the level of effort, the expected wage, and the expected profit for the above wage arrangement. Compare your results to the case where workers are paid a standard wage of $10 and the level of effort and the quality of the product do not alter the wage.
Transcribed Image Text:7. A firm's can sell higher quality products for more: P = 10 + 20 X, where X is the quality of the product sold. Workers hired by the firm make a product, the quality of which depends on effort and luck X=e+E, where X = Quality, e = effort, and e Luck E(=) = 0. .so average quality depends on effort Wages are contingent on outcome (X) where w 10+ 8 X and the cost of effort C(e) = e² with e≥0 Determine the level of effort, the expected wage, and the expected profit for the above wage arrangement. Compare your results to the case where workers are paid a standard wage of $10 and the level of effort and the quality of the product do not alter the wage.
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