Question

3. Now suppose you are done with the business school and are negotiating an employment contract. You are entering a labor market in which times may be either good or bad. If times are good (state 1), the market wage is 20. If times are bad (state 2), the market wage is 10. Workers in this market are expected utility maximizers, and u(c) = 20c - c^2/2. 3.1 Now consider two firms. Firm A pays its workers the market wage, 10 in state 2 and 20 in state 1. Assuming that the probability of state 2 is 3/4, what is the expected wage, and what is the workers' expected utility, from such an arrange- ment? 3.2 Firm B pays its workers wage \(w\) regardless of whether the state is good or bad. What is the smallest value of \(w\) that the firm could pay and still have workers willing to work for it rather than for firm A? How does this wage compare to the expected wage that firm A pays? If each firm adopts its expected plan, and each firm is risk neutral, which firm will earn higher profits?

          3. Now suppose you are done with the business school and are negotiating an employment
contract. You are entering a labor market in which times may be either good or
bad. If times are good (state 1), the market wage is 20. If times are bad (state 2),
the market wage is 10. Workers in this market are expected utility maximizers, and
u(c) = 20c - c^2/2.
3.1 Now consider two firms. Firm A pays its workers the market wage, 10 in state
2 and 20 in state 1. Assuming that the probability of state 2 is 3/4, what is the
expected wage, and what is the workers' expected utility, from such an arrange-
ment?
3.2 Firm B pays its workers wage \(w\) regardless of whether the state is good or bad.
What is the smallest value of \(w\) that the firm could pay and still have workers
willing to work for it rather than for firm A? How does this wage compare to the
expected wage that firm A pays? If each firm adopts its expected plan, and each
firm is risk neutral, which firm will earn higher profits?

3. Now suppose you are done with the business school and are negotiating an employment
contract. You are entering a labor market in which times may be either good or
bad. If times are good (state 1), the market wage is 20. If times are bad (state 2),
the market wage is 10. Workers in this market are expected utility maximizers, and
u(c) = 20c - c^2/2.
3.1 Now consider two firms. Firm A pays its workers the market wage, 10 in state
2 and 20 in state 1. Assuming that the probability of state 2 is 3/4, what is the
expected wage, and what is the workers' expected utility, from such an arrange-
ment?
3.2 Firm B pays its workers wage w regardless of whether the state is good or bad.
What is the smallest value of w that the firm could pay and still have workers
willing to work for it rather than for firm A? How does this wage compare to the
expected wage that firm A pays? If each firm adopts its expected plan, and each
firm is risk neutral, which firm will earn higher profits?

Added by Robert C.

Question

Please give Ace some feedback