Reference no: EM132206682

Question: Your firm presently has standard electric typewriters for its secretaries, but is thinking about switching to a word processing system. The gree screen on the word processors is hard on the eyes and secreataries prefer, therefore, that they be allowed to use the slower conventioanl typewriter. Suppose that all secreataries in the economy have identical tastes and their utility is given by:

U = W (1 - k)

where U is utility, W is their hourly wage, and k is the proportion of the hour that they spend on the word processor. The labor market is competitive; there exists a large number of firms.

(a) Graph the workers' indifference curves for W and k (Hint: An indifference curve plots all points that yield the workers the same utility.)

(b) If one firm in the economy pays workers $2/hr and requires no word processors, what is the wage at a firm that requires secreataries to spend 1/2 of their time on word processing? At which firms are secreataries better off?

(c) Profits per worker hour are given by the following relationship:

p = k - W/8

where p is profit per worker hour, so that the firm is more profitable the more word processing is used and less profitable the higher are wages. Graph the iso-profit curves.

(d) Can you compete successfully for workers with the firm that offers k = 0 and W = 2? What wage and level of k do you offer to secreataries?

(e) If another firm had a profit function that was given by p = k - W/16, would this firm go out of business of take over the industry over time?