11. In Cortland, NY, there are two kinds of workers, Uselets, whose labour is wo
ID: 1152766 • Letter: 1
Question
11. In Cortland, NY, there are two kinds of workers, Uselets, whose labour is worth $1,000 per month, and Candus, whose labour is worth $2,500 per month.
Cortland has exactly twice as many Uselets as Candus.
Uselets look just like Candus, and are accomplished liars. They will always claim to be Candus (who are scrupulously honest and always tell the truth).
Monitoring individual work accomplishments is too expensive to be worthwhile.
A professor who is in love with the sound of his own voice offered to give free monthly lectures on economics to any or all of the workers in Cortland. His lectures had zero effect on productivity, but both Candus and Uselets found them excruciatingly dull. To a Uselet, sitting through each one-hour lecture was as bad (reduced utility by as much) as losing $100. To a Candu, sitting through each one-hour lecture was as bad as losing $50.
Suppose that, rather than only Bingham Industrial providing a pay raise, ALL 100 employers offered a one-time bonus of $200 to any employee who attended one of the professor's lectures.
What will be the wage paid in the entire industry three months after these bonus offers have been made?
Explanation / Answer
Cost to a Candu worker of attending lecture=$50/hour and Cost to a Uselet worker of attending lecture=$100/hour.
A candu worker receives (2500-1000) = $1500 more than a uselet worker.
The signal would be provided if the cost of providing lecture hour is more than $1500
The signal would be provided if the cost of providing lecture hour is less than $1500
The lecture hours should be large enough so that Uselets workers will choose not to provide the signal by attending while the candu workers will choose to provide it.
When the lecture hour=15,the cost to a uselet is exactly equal to the wage premium,so some may provide the signal while some may not.Whereas,uselet will remain indifferent between providing the signal by attending and not providing the signal by not attending.
When the lecture hour>15,the cost to a uselet worker of attending is more than the wage premium,so they will not attend the lecture.
Therefore,the optimal lecture hour should be the smallest number strictly greater than 15 which will ensure that uselet will attend and provide the signal.
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