Micro II BSc III

Spring 2016
In Class Assignment on Ch. 18 & 19.

1. A certain firm can hire two types of workers: Group A workers who have high productivity and
Group B workers with low productivity. Group A workers will add $27,500 to the firm's
revenues per year, while Group B workers will increase the firm's revenues by $15,000 per year.
The firm's managers expect workers to be employed for eight years. The differences in the
workers' productivity levels are reflected in their costs per year of education. Each year of
education (which includes the psychic costs of study effort) costs an A worker $12,500, while
each year costs a B worker $25,000.
a. Under competitive conditions, how much would A and B workers earn?
b. Assuming that the firm is unable to distinguish A from B workers and that it is equally likely
that a worker is of either type, what pay scale will the firm offer?
c. Suppose that the firm decides to use education as a market signaling device to distinguish A
workers from B workers. What education requirement could the firm set?
a. Under competitive conditions workers will receive their marginal revenue product.
MRPA = $27,500 = Wage for A
MRPB = $15,000 = Wage for B
b.
The firm would pay all workers an average wage. In this case, the average wage is
$21,250. This wage overpays B workers $6,250 and underpays A workers by that
amount.
c.
The benefit to education is $12,500 per year for 8 years or $100,000.
B workers will obtain education as long as:
100,000 < 25,000y*
y* > 4
Requirement must be greater than 4 years.
A workers will obtain education as long as:
100,000 > 12,500y*
y* < 8
Requirement must be less than 8 years.
2. In a competitive labor market, shirking on the job can be a problem. In this market for labor
270,000,000
services, the demand for labor is expressed as: = 1.5

where W is wage rate (dollars per hour) and L is number employed per unit of time. The no
2
shirking constraint is expressed as: =
1109
where NSC is the minimum wage workers need not to shirk, and L is the number employed per
unit of time. Assume that the labor force L* = 150,000. Determine the following:
a. the market clearing wage
b. the level of unemployment that would result when firms pay the efficiency wage
c. the efficiency wage

a.
The market clearing wage is the wage that must be paid at full employment, even though
there will be some shirking going on. Solve by inserting into the demand for labor
equation the value of L*.
W* = (270,000,000)/(150,0001.5)
= $4.648 per unit of time.
b. The level of employment that would occur when the efficiency wage is paid is
determined where the NSC curve intersects the demand for labor curve.
W = NSC
270,000,000 2
=
1.5 1109
Le = 95,585 workers
The level of unemployment is
L* - Le = 150,000 - 95,585
= 54,415 unemployed workers.

c. The efficiency wage (the wage to prevent shirking) is the wage that produces 95,588
employed workers. Thus:
We = (270,000)/(95,5851.5)
= (270,000)/(29,552,000)
= $9.14 per unit of time.