Section 7 Notes

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

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Unformatted text preview: 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. 1. Find the value of l that maximizes the sur- plus π + I available to the firm and worker jointly. 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. 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? The firm makes a profit of $0 if it employs no workers. The worker makes an income of $24 if unemployed. So, the disagree- ment point is (0,24). So, in the regular NBS,...
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This note was uploaded on 09/16/2007 for the course ORIE 435 taught by Professor Todd,m. during the Fall '06 term at Cornell.

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

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