Economics 2.odt - a Assuming that the labor can be hired at...

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a) Assuming that the labor can be hired at this going wage, for what values of k should HSR build the new railroad? (Assume that HSR aims to maximize profits without discounting). We need to find k =revenues – wage * workers -cost – k = Written this way 130,0000 -50,000 * 1,000 – 10,000,000 – k = 70,000,000 – k They will only build the railway if maximized profits are k < 70,000,000 b) Suppose that, if the railway is built, after it is built the rail union can make a take-it-or-leave-it wage demand w to HSR to apply just for labour on the new line. The railways only choice is to accept to pay the wage demand, w, or close the new line down. What demand will the union make? Given this, if you were HSR, for what values of k would you build the new line? Why is your answer different from that in part (b)? the unions demand wage w for each employee will be 130,000,000 – w * 1,000 -10,000,000 - k If HSR disagrees, it will get -k Since the railroad is almost finished and the loss k can't be recovered HSR will agree as to w < 120, 000 , 000 1000 So the maximum wage that HSR may accept is w = 120,000

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