Section 7 Notes - Q15 Chap 5 of Binmore A firm makes...

Info icon This preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Q15, Chap 5 of Binmore A firm makes sprockets that sell at $8 each. To make sprockets, it requires various inputs, but these are all free except labor. The number of sprockets produced in a day, s = l , where l hours of labor are used. If the hourly wage is w , explain why the firm’s daily profit is π = 8 l - wl . If the worker regards each hour of leisure as being worth $1, explain why his daily income is I = wl + (24 - l ). Both the worker and the firm are risk neutral.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1. Find the value of l that maximizes the sur- plus π + I available to the firm and worker jointly.
Image of page 2
The total surplus is, π + I = 8 l + 24 - l . Setting its derivative w.r.t l to 0. 4 l - 1 / 2 - 1 = 0 l = 16 . Note that at l = 16, the maximum surplus of 40 is attained.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2. Suppose the worker and the firm bargain about both the wage and the number of hours to be worked. What is their dis- agreement point? How will the surplus be divided if the regular Nash bargaining so- lution is used? What wage will be agreed upon? What will be the length of the work- ing day?
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern