How much would be willing to pay for a screening system

Reference no: EM133206343

Assignment:

Suppose you are a factory owner who needs to hire a worker to run a production line. You know there are two types of worker, high ability and low ability, and there are equal numbers of each in your labor market, but you cannot observe the ability of an individual worker before you hire him. Suppose that workers choose an effort level e, which can be any non-negative number, and which you cannot observe. With a high-ability worker, your production line's output will be q = 2e. With a low-ability worker, your production line's output will be q = e. You know that all workers have a cost of effort function equal to c(e) = e², and their utility functions from a wage of w and an effort level of e are U(w,e) = w - e². It is standard practice to pay workers per unit of output, so you need to decide on the per-unit rate to offer, denoted b. Thus, the wage you will be paying is w = bq. The market price for your good is 5, and your cost of raw materials per unit is 1, so your profit will be Π = 5q - q - w = 4q - w (assume no fixed costs for simplicity).

a. What is the optimal effort level for a low-ability worker receiving a per-unit wage of b in this scenario? What would the output of such a worker be?

b. What is the optimal effort level for a high-ability worker receiving a per-unit wage of b in this scenario? What would the output of such a worker be?

c. Given that you do not know the ability of the worker before you hire him, which value of b maximizes your expected profits? What are your maximized expected profits?

d. How much would you be willing to pay for a screening system that let you know worker ability before you make your hiring decision?

Reference no: EM133206343

Questions Cloud

Do economists oppose policies restrict trade among nations : Should a nation tend to export or import goods for which it has a comparative advantage? Explain. Saudi electronic university. Econ 201.

What challenges face telecom operators in nigeria : What challenges face telecom operators in Nigeria? What factors make Nigeria an attractive market for telecom operators?

Discuss impact of speculative behavior on the oil markets : Then, discuss the speculation argument in detail and report the impact of speculative behavior on the oil markets. University of Evansville.

How to reduce the pollution of the environment : How to find the ideal balance? How to reduce the pollution of the environment and continue the industrial development? Pepperdine University.

How much would be willing to pay for a screening system : How much would you be willing to pay for a screening system that let you know worker ability before you make your hiring decision? Harvard school of Business.

Explain the law of comparative advantage : Ricardo explained the law of comparative advantage on the basis of: the labor theory of value-the opportunity cost theory. Allied American University. ECON 370.

Why is sand becoming an increasingly important resource : Why is sand becoming an increasingly important resource? Where are we mining a lot of sand and what is geologically special about those locations?

Describe the processes of photosynthesis and respiration : Describe the processes of photosynthesis and respiration. How do they relate to one another? How have plants contributed to making Earth a habitable planet?

Was t-rex a predator or a scavenger : Barstow Community College - Was T-rex a predator or a scavenger? Choose one position or the other and then provide evidence citing your sources.

User Account

All Pages