Reference no: EM132586920
1. Suppose that Google is considering hiring a worker for two months and providing her with specific training in the first month. The worker's MPL is $2,000 during the training period, but rises to $3,000 in the second month after training is complete. Google faces an interest rate of 5%, and the cost of training the worker is $800. One issue we discussed in class is that workers may not be able to compare present and future revenues and costs in the same way that firms can. For this problem, assume that the worker has a very specific budget requirement: she must make at least $2000 in each period in order to pay for her share of her family's living expenses (rent, healthcare, groceries, etc.). If the worker does not go to work for Google or quits after the first month, she can get a job at Microsoft with a monthly wage of $2,000.
(a) What is the most that a profit-maximizing firm can afford to pay the worker in the second month, given the worker's budget constraint in the first month?
(b) Given your answer in part (a), is it possible for Google and the worker to come to an agreement in which the worker goes to work for Google for both months?
We also discussed the possibility that workers actually have lower productivity during training periods. Now assume that during the first month of training, the worker's MPL declines to $1,900, but the worker's budget requirement remains the same (as do all other values).
(c) If Google were still to pay the worker $2,000 during the first month, what is the maximum amount they could pay her during the second month without violating the profit-maximizing condition?
(d) Given your answer in part (c), is it still possible for Google and the worker to come to an agreement in which the worker goes to work for Google for both months? If your answer is yes, explain why Google is willing to pay the worker more than her marginal product in the first period.
(e) If your answer in (d) is yes, then you should also be able to identify a range of possible wages in the second period in which Google would be willing to hire the worker, and the worker would be willing to accept Google's employment offer. Which wage offers in this range do you think are most likely to occur, and why? (If your answer in part (d) is 'no', you may ignore this part of the question)
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