A firm hires two risk-neutral workers to assemble bicycles and pays $24 for each

Question

A firm hires two risk-neutral workers to assemble bicycles and pays $24 for each assembly. Charlie’s total cost of allocating effort to the production process is C = 2N^2, where N is the number of bicycles assembled per day. Donna’s cost is C = (N^2)/2.

(a) What will be each worker’s daily earnings?

(b) suppose the firm pays a flat wage of $160 per day and fires any worker who does not assemble at least 9 bicycles per day. A dismissed worker remains unemployed and has zero income. How many bicycles will each worker assemble per day?

Explanation / Answer

a) Worker will compare their wage rate with the marginal cost of production

MCD = 2N/2 = N and MCC = 4N. With wage = 24, we have

N = 24 by Donna and N = 24/4 = 6 by Charlie.

b) With flat rate of 160 per day, now workers will compare total cost

160 = 2N^2 160 = N^2/2

N(Charlie) = 8.9 N(Donna) = 17

Firm will dismiss Charlie as he does not produce 9 bicycles.

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