HE211 lec5_2016 August CSB(1) - Lecture 5 Wages and...

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Principles of Microeconomics
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Chapter 19 / Exercise 7
Principles of Microeconomics
Mankiw
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1 Lecture 5 Wages and Incentive Pay
We have textbook solutions for you!
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Principles of Microeconomics
The document you are viewing contains questions related to this textbook.
Chapter 19 / Exercise 7
Principles of Microeconomics
Mankiw
Expert Verified
Retirement Model with Pension What is net worth? How much do you own at this point in time? All households in Singapore, Net Worth = Total assets – total liabilities Banks in Singapore are financially strong because Total assets /Total liability = 6 in 2015. N 60 = net worth at aged 60. At the age of 60, if a public employee does not work but enjoys retirement benefits per month, his net worth does not increase in this Model because it is assumed that pension benefits per month = consumption per month. Net worth only increases each year by (W-B) as he works for each extra year. 2
Many buyers and many sellers of labour services Equilibrium point is J Wage is W 20 and 20 workers employed (E 20 ) Wage bill = 0 W 20 J E 20 . Area under the supply curve = TE Worker surplus is area W 20 JW R 0 Wage Individual workers D L =VMP J E 20 W 20 S L Diagram 7.2: Competitive Labour Market W R
4 Announcements All lectures are conducted at LT 17 unless there is make-up lecture, for which the venue will be announced. Tutorials will start from Week 2. There will be two MCQ tests. The first MCQ test will be conducted during Lecture 8 on 3 th of October at LT24?? . The second MCQ test will be conducted during Lecture 13 on 7 th of Nov at LT 24??. There will be NO supplementary tests. Unless a student has a valid mc, a non-appearance for an MCQ test means the score is zero for the test.
Announcements 12 Sep is a public holiday. Make-up lecture with recording is on 15 Sep 2016 Venue and Time: LT 12 from 9am – 11am. 5
6 Motivating workers: In the Income-Leisure Model, employer pays workers $3,000 per month and workers promise to work 8 hours a day. So, employer and employees are happy. Not so easy. Workers may not put in best effort in each hour. Then, you may suggest that we watch them work so that they work hard. But the cost of monitoring is high. You may say, okay, we fire those who are lazy. But there are costs to recruitment and high labour turnover is no good for profit maximization. This uncertainty about whether an employee will give his best effort is caused by three factors, namely, asymmetric information, principal-agent problem and the cost of monitoring workers.
7 How to solve the problem Asymmetric information: This refers to the situation where workers know more about themselves than the employers. Principal-agent problem: Owners are principals and employees are agents. Agents do what they like and they may not maximize profits. The above two factors are not that important if the cost of monitoring workers is low. But cost of monitoring is not low although it has decreased significantly due to advanced technology. So, what can firms/owners do? Dual market theory suggests that, for new workers, treat them as outsiders with a period of probation.

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