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hw3ansEC 480

# hw3ansEC 480 - ECN 4890 Spring 2006 Answers to Homework 3...

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ECN 4890 Spring 2006 Answers to Homework 3 Suppose that there are two types of workers: “Quicks” and “Slows”. Quicks can earn \$36 per hour in alternative employment, while Slows can earn \$20. Quicks can produce 20 widgets per hour, while Slows can produce 8 widgets per hour. a. Which is the best type of worker for the firm to hire? Explain. Calculate \$ per output for each: Quicks = \$36/20 = \$1.80 and Slows = \$20/8 = \$2.50. So we should hire the Quicks because they are more cost effective. b. Suppose that firms cannot distinguish between workers but each worker knows if he is a Quick or a Slow. If the firm advertises that it is willing to pay \$36 per hour what will happen? Both Quicks and Slows will apply for the job and the firm will be unable to distinguish between them. Instead of simply offering \$36 per hour, your firm wants to implement a probationary period with monitoring. Monitoring is expensive so you propose random monitoring where 8 out of every 10 workers will get monitored during the first year. When the firm monitors a worker, it can measure output perfectly and

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