QUESTION 2 Consider a self-employed worker. The worker produces output, q, according to the production function q(h)=h, where h is the number of hours worked. The worker can sell each unit of output for $10 and has a cost of effort given by c(h)=h. This worker should optimally work for v hours and will earn a profit of $ Suppose now that the self-employed worker decides to incorporate. She becomes the manager of a firm with one employee who does the actual work. The manager pays a wage of w to the employee. The employee's production function and cost of effort are as before. Now the employee will optimally work for v hours, earning $ v. The profit of the firm will be $ v and the total surplus is $ If the manager instead pays w=10, the total surplus is $ v and the firm's profit is S

QUESTION 2 Consider a self-employed worker. The worker produces output, q, according to the production function q(h)=h, where h is the number of hours worked. The worker can sell each unit of output for $10 and has a cost of effort given by c(h)=h. This worker should optimally work for v hours and will earn a profit of $ Suppose now that the self-employed worker decides to incorporate. She becomes the manager of a firm with one employee who does the actual work. The manager pays a wage of w to the employee. The employee's production function and cost of effort are as before. Now the employee will optimally work for v hours, earning $ v. The profit of the firm will be $ v and the total surplus is $ If the manager instead pays w=10, the total surplus is $ v and the firm's profit is S

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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