Question

:) Suppose a worker ears 30$ per working hour. The effort he puts in his work implies
a disutility equal to 5$ per hour. There is an unemployment benefit equal to 20$ per
working hour, and the worker suffers a psychological cost of 1s per working hour if
he is unemployed. Assuming there are no other firms on the market, is it convenient
for the worker to stay employed or to leave work? Assuming the firm where the
worker is employed fails, and now there is a new firm on the market offering him
25$ per hour to perform the same task, what would the worker do? Accept the offer
or leave employment? Assuming that then the unemployment benefit is increased to
24$, what would the worker do?​

Answer 1

Explanation:

Maria, cares about two things: her income, and not having to work too hard. But work is worth more to her than her next best option, which is unemployment—she earns an employment rent. While employed, she can choose how hard to work. Her level of effort, , is the proportion of each hour she spends working. If she puts in too little effort, she risks being fired, and losing her employment rent. The size of the employment rent depends, in particular, on the wage chosen by her employer. For each level of the wage, , she chooses the level of effort, , that is her best response to the situation she faces. Her best response curve is a function that tells us the level of effort chosen at each level of the wage:

=()

To model Maria’s decision fully, we could start from her utility function, and solve her utility maximization problem to find her best response to each wage. But in this unit we are focusing on the interaction between Maria and her employer. So we skip this step and simply describe what shape we would expect her best response function to have (so that we can draw it) by thinking about how she makes her decision.