# Answers to Tutorial 5_2016_August - Tutorial 5 1 Suppose...

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1 Tutorial 5 1. Suppose there are 100 workers in an economy with two firms. All workers are worth \$35 per hour to firm A but differ in their productivity at firm B. Worker 1 has a value of marginal product of \$1 per hour at firm B; worker 2 has a value of marginal product of \$2 per hour at firm B, and so on. Firm A pays its workers a time-rate of \$35 per hour, while firm B pays its workers a piece rate. How will the workers sort themselves across firms?
2 Question 1 Assume that Firm B pays workers a piece rate according to their VMP. Workers 1 to 34 work for Firm A as \$35/hr > their VMP. Workers 36 to 100 work for firm B as \$35/hr < their VMP. Worker 35 is indifferent. More productive workers work for the piece rate firm because they will be paid < their VMP in Firm A. \$ 35 Ability Piece rate pay scheme of Firm B Time- Rate pay scheme of Firm A
3 2. A firm hires two workers to assemble bicycles. The firm values each assembly at \$12. Charlie’s marginal cost of allocating effort to the production process is MC = 4N , where N is the number of bicycles assembled per hour. Donna’s marginal cost is 6 N . Note: Assembly is the work of putting all the parts together. You get a bicycle as a result. Hence , when the firm values each assembly at \$12, it will set the piece rate at \$12/assembly (a) If the firm pays piece rates, what will be each worker’s hourly wage? (b)Suppose the firm pays a time rate of \$15 per hour and fires any worker who does not assemble at least 1.5 bicycles per hour. How many bicycles will each worker assemble in an 8 hour day?
(a) If the firm pays piece rates, what will be each worker’s hourly wage?
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