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© 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, wk = w . 3. What would be the wage rate that ensures just enough

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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 Kraft’s 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...
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