Lecture 13 - Lecture 13 Lecture 13 Theory of Compensating...

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ecture 13 Lecture 13 Theory of Compensating Differences II (The Firm Side and Equilibrium)
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oadmap Roadmap irms choice between higher wages or Firms choice between higher wages or cleaner work environment. quilibrium between workers and firms • Equilibrium between workers and firms. • Problems with estimating compensating differentials. • Benefits.
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efinition Definition compensating differential which is also A compensating differential , which is also called a compensating wage differential r an qualizing difference is defined as or an equalizing difference , is defined as the additional amount of income that a iven worker must be offered in order to given worker must be offered in order to motivate them to accept a given ndesirable job relative to other jobs that undesirable job, relative to other jobs that worker could perform.
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mployer Problem Employer Problem • Employers can produce output using two technologies (dirty and clean). •E m ployers must pay a cost of creating a clean work environment that they pass on to the workers. – Example: Firms can offer day-care for workers but have to pay some cost to provide this service. As such some firms will provide it and pay a lower wage to workers. • All firms operate at zero profits.
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efinition Definition oprofit: he isoprofit curve (i e one Isoprofit: The isoprofit curve (i.e. one profit) shows the combination of inputs at produces the same level of profit that produces the same level of profit. • Conceptually similar to an indifference curve for a consumer.
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single firm’s oprofit urves A single firm s Isoprofit curves ages are higher Wages are higher The firm is indifferent between points M and since they make zero N since they make zero profits at both points. ages are lower Wages are lower
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Recall from last lecture Preferences of a worker Note: U 3 >U 2 >U 1 The worker is indifferent between points K and J since they have the same utility at both points.
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efinition Definition areto efficiency: ny change to make Pareto efficiency: Any change to make any person better off is impossible without aking someone else worse off making someone else worse off.
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single worker and a single firm A single worker and a single firm
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Lecture 13 - Lecture 13 Lecture 13 Theory of Compensating...

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