Suppose there are two types of workers. Type 1 workers have a marginal product of labor (MPL) = 1. That is, if a firm hires an extra Type I worker, that worker will produce 1 extra unit of output. Type II workers have an MPL = 2. The firm can sell each extra unit of output for P = $10,000.
Firms are unable to identify whether or not a worker is a Type I or Type II unless the worker sends a signal of what type they are. The signal that workers can send is a level of education, e. The firm adopts the following hiring strategy:
If e > e* then offer the worker a wage rate equal to $20,000.
If e < e* then offer the worker a wage rate equal to $10,000.
The cost to Type I workers of getting education level e is $4000*e. The cost to Type II workers of getting education level e is $2000*e. Assuming the workers optimally choose e, characterize the values of e* that will lead to a separating equilibrium.
Suppose there are two types of workers. Type 1 workers have a marginal product of labor (MPL) = 1. That is, if a firm hires an extra Type I worker, that worker will produce 1 extra unit of output. Type II workers have an MPL = 2. The firm can sell each extra unit of output for P = $10,000.
Firms are unable to identify whether or not a worker is a Type I or Type II unless the worker sends a signal of what type they are. The signal that workers can send is a level of education, e. The firm adopts the following hiring strategy:
If e > e* then offer the worker a wage rate equal to $20,000.
If e < e* then offer the worker a wage rate equal to $10,000.
The cost to Type I workers of getting education level e is $4000*e. The cost to Type II workers of getting education level e is $2000*e. Assuming the workers optimally choose e, characterize the values of e* that will lead to a separating equilibrium.
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Suppose that a monopoly firm finds that its MR is $72 for the first unit sold each day, $71 for the second unit sold each day, $70 for the third unit sold each day, and so on. Further suppose that the first worker hired produces 5 units per day, the second 4 units per day, the third 3 units per day, and so on.
Instructions: Enter your answers as whole numbers.
a. What is the firm's MRP for each of the first five workers?
| Worker | MRP, unregulated |
| 1 | |
| 2 | |
| 3 | |
| 4 | |
| 5 |
b. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must charge exactly $62 per unit for all units sold. At that price, what is the firm's MRP for each of the first five workers?
| Worker | MRP, regulated |
| 1 | |
| 2 | |
| 3 | |
| 4 | |
| 5 |
c. If the daily wage paid to workers is $258 per day, how many workers will the unregulated monopoly demand? Worker(s).
If the daily wage paid to workers is $258 per day, how many workers will the regulated monopoly demand? Worker(s).
Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage? Unregulated/Regulated.
d. If the daily wage paid to workers falls to $121 per day, how many workers will the unregulated monopoly demand? Worker(s).
If the daily wage paid to workers falls to $121 per day, how many workers will the regulated monopoly demand? Worker(s).
Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage? Unregulated/Regulated.
e. Comparing your answers to parts c and d, does regulating a monopoly's output price always increase its demand for resources? Yes/No.
