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![Suppose the market for discrete job risk consists of multiple heterogeneous workers and
multiple heterogeneous firms. Worker's compensated risk premia Z; are distributed according to
the uniform distribution Z; ~ U[1,6]. The productivity cost of reducing the job risk for the firm
MC; is distributed according to the uniform distribution MC; ~ U[2,6].'
1. What is the equilibrium market compensation and the share of risky jobs in this market?
2. Suppose that the government decides to subsidize the cost of reducing job risk, decreasing
the cost by s = 2 for all firms. What is the new equilibrium market compensation for the
job risk and the share of risky jobs in the economy? Provide the intuition for this change.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3a3a7d68-9216-43ad-b47b-62fb3bb612bd%2Fd5d49f21-7df7-448c-8974-c57dc6c86a20%2F6rhwe8n_processed.png&w=3840&q=75)
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- Question 13 Consider a market in which there are two types of workers L and H. Each type of worker has a different level of productivity, but that productivity is unobservable ex ante to potential employers. Before seeking employment at a firm in the market, all workers can (if they choose) get some level of education e. This choice of education e is observable to all, including potential employers. Assume that the market is competitive, so expected profits must be zero in equilibrium. The L-type workers have a productivity of 2 if they work for a firm in the market. They also have an outside option of 2. The utility function of the L-type workers UL - wL- eL, where wl is the wage received and eL is the level of education they obtain. The H type worker has an outside option of 2 and a productivity of 4 if they are employed by a firm in the market. The utility function for a H-type worker is UH=wH - (%)eH, where wH is the wage paid to a H-type and eH is the education they choose to get.…1. Consider the figure below, which depicts the matching of jobs and workers. There are two jobs at firms X and Y and two workers A and B. Wage Rate Way WAX RAX R Ryy Risk of Injury a. Which worker is more risk averse? A or B? Which job does he take? How much does he carn? What is the highest utility he can achieve given the job opportunities? b. Which firm has the higher cost of reducing risk? Whom will it employ? How much will it pay? What is the highest level of profits it can achieve given the labor force? c. Draw the hedonic wage function on the graph and explain what kind of information it contains. d. What are the two main behavioral insights of the hedonic wage theory?1. | Consider Spence job market signaling model. A worker's type is 0 e{6, 9}, where the probability that 0 = 9 is equal 2 e (0, 1). The total number of workers equals N. The productivity of a worker in a job is . Each worker chooses a level of education e20.The cost of obtaining education level e is 3e/0. Reservation utility is 4 for every worker. All workers are price takers and the price of the final good produced is 1. Assume that firms are risk neutral and employment lasts for one year. Assume that there are two firms that compete by offering wages simultaneously and independently. (a) Find all separating equilibria and identify a Pareto superior separating equilibrium. Do not forget to specify the equilibrium wage scheme. (b) Calculate TS and find the value of society loss (DWL) for the best (Pareto superior) signaling equilibrium. (c) Find all values of 1 e (0, 1) under which prohibition of signaling results in a Pareto improvement in comparison with the best (Pareto superior)…
- Venture capital (VC) firms are pools of privatecapital that typically invest in small, fast-growingcompanies, which usually can’t raise funds through other means. In exchange for this financ-ing, the VCs receive a share of the company’s equity, and the founders of the firm typically stayon and continue to manage the company.a. Describe the nature of the incentive conflictbetween VCs and the managers, identifyingthe principal and the agent. b. VC investments have two typical com-ponents: (1) managers maintain some ownership in the company and often earnadditional equity if the company performs well; (2) VCs demand seats on the compa-ny’s board. Discuss how these two compo-nents help address the incentive conflict.Competing_risk neutral principals seek to attract workers. I he task the worker performs when hired generates an output that is either worth €S or €F, with S larger than F. The outcome is verifiable so that contracts take the form of wages (WS, WF), whereby Wg is paid when the output is worth €S and WF is paid otherwise. S The workers are risk averse and they differ in their ability. A worker's ability can be high (GOOD type) or low (BAD type). The variable Pt denotes the probability with which a worker with ability produces an output worth t €S. Therefore, a worker with ability t produces an output with an expected value Vt = (ptS+ (1 - pt)F). And the overall expected profits gathered by the principal who hires this type are Ent = - Vt ptws (1 — pt)wF. Finally, a worker with ability t has an expected utility given by EUt = Pt√√ws + (1 − Pt) √/wF The following table gives the values for Pt and Vt for each type. Value for Vt Good type Bad type Value for Pt 3/4 1/2 256 144Suppose that the expected value of weekly profits for an ice cream shop, before paying the manager, Amy, is where e is Amy's weekly avertime hours. Amy is risk-neutral but incurs a cost for working overtime. Thus, tatal expected surplus is What level of effort maximizes total surplus? The value of overtime that maximizes total surplus is e-hours. (Enter your response rounded to one decimal place.) E(x)=500+10c C(e)=² E(S)-[(x)-C(e).
- Derive the utility function of a worker who is aiming to maximize his utility in the market for risky jobs. Explain and illustrate graphically how this worker will be making his choice among different alternatives of risk/wage combinations.Classify cach statement as either true or false. A tournament compensation scheme is subject to ability risk. Josephina receives the largest bonus because she had the highest sales last month. Jana had the second highest sales and receives the second largest bonus. This is an example of a tournament compensation scheme. Professors who grade on a curve are using a tournament compensation scheme. Answer Bank truc false 00QUESTION 12 Suppose that a worker value jobs by both the wage rate and the workplace collegiality. The woker's utility is strictly increasing in the wage rate but strictly decreasing in the chance of being bullied in the workplace. The utility function of the worker is U = wa (1- ), where a = 0.5, w is the wage rate and b is the probability that a worker is bullied in a workplace. Suppose for a typical job A, the chance of getting bullied is 0.01, and the wage rate is 100. Which of the following statements is correct? If job B offer w = 121 and b = 0.04, the worker would prefer job B to job A %3D If job B offer w = 144 and b = 0.09, the worker would prefer job B to job A %3D If job B offer w = 80 and b = 0, the worker would prefer job B to job A If job B has bullying probablity b = 0.04, the worker is indifferent between job A and job B. Then, the compensating wage differential of job B is at least 25. %3D If job B offer w = 80 and b = 0, the worker would be indifferent between job A…
- 2. Suppose, as in class, that the utility function of a worker is U (w, e) = Vw - e, where w is the wage and e € {0, .8} is the level of effort. Suppose the reservation utility is 1. Suppose the outcome is $10 or $0 and that the probability of the $10 outcome is .6 if the worker works hard and .2 if the worker chooses low effort. (a) If you could costlessly monitor the worker's effort, would you want the worker to work hard? What payments would you offer and for what effort?There are 50 workers in the economy in which all workers must choose to work a safe or a risky job. When it comes to accepting a risky job, Worker 1’s reservation price is $5; worker 2’s reservation price is $6, worker 3's reservation wage is $7, and so on. Assume there are exactly 12 risky jobs. (a) What is the equilibrium wage differential between safe and risky jobs? Which workers will be employed at the risky firm? (b) Suppose now that an advertising campaign, paid for by the employers who offer risky jobs, stresses the excitement associated with “the thrill of injury,” and this campaign changes the attitudes of the work force toward being employed in a risky job. Worker 1 now has a reservation price of $1, worker 2’s reservation price is $2, and so on. There are still only 12 risky jobs. What is the new equilibrium wage differential? c) What is the maximum the firm should be willing to pay for its ad campaign?Q1. Consider the adverse selection model, where the ability of each worker, 0, can be 1, 2 or 5. Workers observe their own abilities, but firms only observe the overall distribution of probabilities (1/3, 1/6, 1/2). Suppose that the reservation value is r(0) = 0.5+0.50. (a) What is the range of wages, for which all workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for which a firm hires a random worker? Will there be a functioning labor market in this case? (b) What is the range of wages, for which no workers accept the competitive wage? (c) What is the range of wages, for which only lowest type workers accept the competitive wage? What is expected productivity in this case? What is the range of possible wages for which a firm hires a random worker in this case? Will there be functioning labor market? (d) What is the range of wages, for which only lowest and medium type workers accept the competitive wage? What is…