PROBLEM QUESTIONS Essay Example

PROBLEM QUESTIONS

Question 1

Consumption

c = A₀ + W (T- L)

1.5W U1

.

W U0

h1 h0 Leisure hours

The optimal number of working hours initially increases. With introduction of overtime pay, the worker will have the incentive to increase working hours in order to consume at high indifference curve. A continued accumulation of income would eventually make the worker spend the excess income on leisure thus; it is possible to reduce the optimal working hours under this circumstance.

Question 2.

1. S-workers

Cost $40/hr, 80 units/hr

40/80=1/2

Cost of producing one unit is $ 0.5

U workers

Cost $4/hr, 6units/hr

Cost of producing one unit is $0.67

The firm should hire skilled workers since the cost of producing one unit using this type of workers is lower compared to the case of unskilled workers

2. If Q* is 960 units/hr, the net gain of using the right type of workers will be;

S-workers

960units/$40=$24/unit

U-workers

960units/$4=$240/unit

The net gain of using the right type of workers will be;

$(240-24)/unit= $216/unit