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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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Consider a worker whose utility is equal to the amount of dollars she has (U = $) and who can earn $100 a day as a bank teller. However, she takes a job as a worker in a firm that produces shirts. She and her coworkers are monitored at random by their employer to see if they are exerting a target level of effort of e* = 15 units. Assume that the probability of any worker being monitored is p. Also assume that e* is the same level of effort the worker would have to exert as a bank teller. If she is monitored and her employer finds that she is exerting at least 15 units of effort, she is paid > $100. If she is caught putting in less than 15 units of effort, she is fired on the spot but given severance pay of w < w. Say that she suffers a disutility of effort of $2, in monetary terms, for every unit of effort she exerts, so that the dollar cost of exerting the target level of effort of e* is - 2e*. (If she chooses to exert a lower level of effort than e*, we can assume that she will not exert any effort at all because she loses her job if she is caught working at any level below e*, no matter what that level is. Of course, she has no incentive to exert more than e* units of effort.) a) Say that her employer gives her a wage of $140 a day if she exerts the required 15 units of effort or gives her severance pay of $60 if she is caught working at a lower level of effort and fired. Will this worker put in the required amount of effort or will she shirk? b) Will this worker prefer a job at the shirt factory or at the bank?
Transcribed Image Text:Consider a worker whose utility is equal to the amount of dollars she has (U = $) and who can earn $100 a day as a bank teller. However, she takes a job as a worker in a firm that produces shirts. She and her coworkers are monitored at random by their employer to see if they are exerting a target level of effort of e* = 15 units. Assume that the probability of any worker being monitored is p. Also assume that e* is the same level of effort the worker would have to exert as a bank teller. If she is monitored and her employer finds that she is exerting at least 15 units of effort, she is paid > $100. If she is caught putting in less than 15 units of effort, she is fired on the spot but given severance pay of w < w. Say that she suffers a disutility of effort of $2, in monetary terms, for every unit of effort she exerts, so that the dollar cost of exerting the target level of effort of e* is - 2e*. (If she chooses to exert a lower level of effort than e*, we can assume that she will not exert any effort at all because she loses her job if she is caught working at any level below e*, no matter what that level is. Of course, she has no incentive to exert more than e* units of effort.) a) Say that her employer gives her a wage of $140 a day if she exerts the required 15 units of effort or gives her severance pay of $60 if she is caught working at a lower level of effort and fired. Will this worker put in the required amount of effort or will she shirk? b) Will this worker prefer a job at the shirt factory or at the bank?
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