Workers are mobile between cities. The utility function depends on the wage is u(w) = w¹/2 In isolated firms, the wage is $144, but the cost of switching is $44. Expected Utility 12 11 ✓ 10 180 $100 $121 $144 s= switch cost $44 w=$144 r is the probability of keeping the job Expected utility is: E(U)= (r) x u(w) + (1-r) x u(w-s) For that reason, the worker has a -gamble- between earning $144 if he keeps his/her/their job or earning (144-44) $100 if they lose their job. However, in the cluster, the cost of switching is zero. Therefore, the cluster firm can offer $121 instead of $144. Suppose the switching cost for the isolated site increases to $80. What new wage can the cluster firm offer on this new equilibrium? $

Workers are mobile between cities. The utility function depends on the wage is u(w) = w¹/2 In isolated firms, the wage is $144, but the cost of switching is $44. Expected Utility 12 11 ✓ 10 180 $100 $121 $144 s= switch cost $44 w=$144 r is the probability of keeping the job Expected utility is: E(U)= (r) x u(w) + (1-r) x u(w-s) For that reason, the worker has a -gamble- between earning $144 if he keeps his/her/their job or earning (144-44) $100 if they lose their job. However, in the cluster, the cost of switching is zero. Therefore, the cluster firm can offer $121 instead of $144. Suppose the switching cost for the isolated site increases to $80. What new wage can the cluster firm offer on this new equilibrium? $

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

A firm's revenue R is stochastically related to the effort exerted by its employee. Effort is a continuous variable. The employee can choose any level of effort e e [0, c0). The choice of effort affects revenue so that: E(R|e) = e and Var(R|e) = 1 where E(R|e) and V ar(R|e) denote the expected value and variance, respectively, of rev- enue when the employee exerts effort level e. The employer cannot observe the level of effort exerted by the employee. The employer wants to design a wage contract w based on the revenue and considers only contracts of the form: w = a + BR, and so the employee is guaranteed a payment a and then a bonus payment ßR which de- pends on revenue. The employee is a risk-averse expected utility maximiser. A contract w gives expected utility: Eu(w\e) = E(w\e) – oV ar(w\e) – c(e) where E(w|e) and V ar(w|e) denote the expected value and variance of the contract, re- spectively, conditional on effort e, p is a parameter of risk aversion, and c(e) denotes the…
You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value $30,000 $49,000 $68,000 $87,000 Probability 0.25 0.25 0.25 0.25 The expected value of hiring one employee is $ Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. The expected value of an employee who would apply for the position, at this salary, is $ Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is
In the Hawaiian Beach Boy surf board vendor scenario, what if the fine was increased to $190 but the probability of a fine decreased to one in 20 days, 5%? What would be the expected value – Exp(RS) -- of continuing to rent surfboards? Assume the other numbers stay the same. He makes $300/day and to rent boards from friends costs him $100 a day. So, he makes $200 a day. Write out the expected value formula, plug in the numbers, and show the math. Hint: the Exp(RS) should be higher than the previously calculated $160.
A firm's revenue is R = 100g - 4q2 and cost is C = %3D 100 + 20g. The owner of the firm offers two alternative compensation packages to the manager: 1) 40% share of the company's profit or 2) 20% of the company's revenue. Which package will the manager choose?
Thelma is indifferent between $100 and a bet with a 0.6 chance of no return and a 0.4 chance of $200. If U(0) = 20 and U(200) = 220, then U(100) = :
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. Suppose you are paying workers a wage equal to bq. What is the profit- maximizing value of 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…
Mr Usu has an expected utility function with u(x) = x0.5. He is analyzing an investment opportunity that promises to pay out $1,160 with prob. 0.6 and $2,800 with prob. 0.4. What is the expected utility of this opportunity?