Suppose that the production function for a particular firm is Q = w∙E, where Q is output, w is the daily wage and E is employment. Suppose the firm hires 100 workers each day.
What is the marginal product of the wage (MPW)?
What is the average product of the wage (APW)?
What is the efficiency wage?
What level of output corresponds with an elasticity of output with respect to the wage equaling 1?
Suppose there is an increase in the demand for the firms output such that E increases. What happens to the efficiency wage?
Educators have recently proposed an alternative system for students who are in K-12 public schools. Instead of receiving grades, students study for a certificate of mastery test in a particular subject, which is given periodically throughout the school year. If the student passes the test, he or she moves on to the next level; if the student fails the test he or she continues studying the material until the test is past. A person graduates from high school when he or she has passed 12 successively more difficult certificate of mastery tests in a subject matter for all required subjects.
Explain the rationale behind the proposed system. Specifically, what form of compensation scheme does this proposed system resemble?
If students are given a choice between schools that offer the proposed system and those that offer the traditional K-12 type education, what kind of students would opt for the new system?
What are the potential advantages and disadvantages with using the proposed educational scheme?
Suppose test scores are measured on a relative, rather than an absolute basis (e.g., only the top 10 percent pass the test). What form of compensation scheme does this proposed system resemble? Explain.
What are the advantages and disadvantages of the scheme proposed in (D)?
A famous offensive lineman in professional football, after being fined for coming to training camp overweight, complained to the press about his contract. He was upset that his compensation was based on indirect measures of performance, like weight, while the contract of their notoriously cubby quarterback only involved his performance during the season. Explain the rationale for the professional football teams compensation package and how it might lead to the observed low pay of linemen relative to quarterbacks.
In a symphony orchestra, the first-chair of an instrument (e.g., the lead violinist) is generally paid significantly more than the second-chair, and so on. What type of compensation scheme is this and why might an orchestra choose such a scheme? Specifically, what attributes of a symphony orchestra make this compensation scheme preferable to the alternatives.
In chapter 2, you were introduced to two types of real estate firms. First, a standard real estate firm that paid an individual a flat salary plus a share of the realtor's fee that is collected by the firm when a house is sold. Second, a firm called TREX that required the realtor to pay a daily fee to the firm in exchange for the right to collect the entire realtor's fee.
What is the daily (upfront) fee in the context of this chapter?
What is likely to be the distribution of talent between the standard real estate firm and the TREX-type firms if realtors are able to choose for whom to work? Explain.
Given your answer in (B), why do we continue to observe both types of firms in the market?
