Reference no: EM133082581
Problem: Labor Discipline Homer dislikes working at the local nuclear power plant, but he needs the money so he works 40 hours a week. If he were fired, he would receive unemployment benefits of $5/hour.
1. What is Homer's reservation wage?
2. Draw Homer's best response function, showing how much effort he will put into his work (with 0being no effort and 1 being absolute effort) depending on his wage. Why does Homer's best response function have the slope and shape it does?
3. Assuming that Mr. Burns knows Homer's best response function (as you drew it above), what wage will his boss Mr. Burns offer Homer? Will Homer accept? If so, how much effort willHomer put in on the job? Show any equilibrium in the figure above.
4. Suppose that at the equilibrium you found in (3) Homer experiences a disutility of effort of $1 anhour, and that if he were fired he would be unemployed for 26 weeks until he found another job with the same wage and disutility of work as the job at the nuclear power plant. What is Homer'semployment rent? Show your calculation.
5. The financial system collapses, the economy slides into a recession, the unemployment ratedoubles, and it would now take 52 weeks for Homer to find a new job. What happens to Homer's employment rent if he continues to be paid the same wage for the same level of effort in (3)?6. How does the recession shift Homer's best response function? Do you think this will lead Mr. Burns to change his wage offer? Why or why not?
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