Quick%20Quiz%2015%21 - wk = w . Hadi Salehi Esfahani...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
© Hadi Salehi Esfahani Quick Quiz 15! Kraft Foods, Inc., wants to ensure that its workers have the incentive to put forth effort at work. To this end it decides that it must pay a premium of $5000 per year in excess of its workers’ reservation wage, R (expected payoff if they quit or are laid off). Suppose the annual wage rate paid by the other employers in the labor market is w . Let the probability of getting a job for an unemployed worker be 1  u . That is, R = (1  u ) w . Kraft’s wage rate is wk = $5000 + (1  u ) w . 1. If u = 0.05 and w = $50,000, what would be the wage rate at Kraft ? 2. If u = 0.10 and w = $50,000, what would be the wage rate at Kraft ? Suppose all firms pay the same wage rate as Kraft,
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: wk = w . Hadi Salehi Esfahani Solution to Quick Quiz 15: 1. If u = 0.05 and w = $50,000, what would be the wage rate at Kraft ? wk = $5000 + (1 u ) w = $5000 + (0.95)$50,000 = $52,500 2. If u = 0.10 and w = $50,000, what would be the wage rate at Kraft ? wk = $5000 + (1 u ) w = $5000 + (0.9)$50,000 = $50,000 Hadi Salehi Esfahani Solution to Quick Quiz 15: 3. What would be the wage rate that ensures just enough incentives for Krafts workers to put forth effort when u = 0.10? When u = 0.05? wk = $5000 + (1 u ) w = $5000 + 0.9 w wk = w = $5000/0.1 = $50,000 wk = $5000 + (1 u ) w = $5000 + 0.95 w wk = w = $5000/0.05 = $100,000...
View Full Document

This note was uploaded on 01/27/2012 for the course ECON 509 taught by Professor Villamil during the Fall '08 term at University of Illinois, Urbana Champaign.

Page1 / 3

Quick%20Quiz%2015%21 - wk = w . Hadi Salehi Esfahani...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online