Question

Really confused about this problem.Please tell me the answer as specific as possible!Thanks!

1. An employee of a firm has a job where the employee can easily adjust the number of hours they work for the employer per year. The employee is currently paid $40 per hour and will work 2000 hours in 2018. The employer had a good year in 2018 and is considering two changes in the employee's compensation for 2019. a) Suppose the employer decides to raise the employees wage to $45 per hour. Explain why it is unclear whether the wage change will cause the employee to choose more or less work in 2019. (Note: The ability of the firm to change wages means this firm is not in a competitive labor market, but this has no impact on the worker's decision) (1 point) b) The other alternative the firm is considering is paying the employee a $10,000 bonus, but not changing the wage. Explain how this will change your answer to (a) about how much the employee works in 2019. Explain how it is possible both options cost the employer the same amount of money (1 point)

Answer 1

10 The increase in wage can either decrease o increase the hoog worked. This is because an increase in wage has both effect and income effect that wolk in! Substitution different directions substitution effect. An increase in wage increasy the opportunity cost of leisure, There by making | - the coster increase no of howy works. Income effect. The increase in wage also mokey the wolkey sicher, there by making the worker decreage no. of hoog wores. A 1. Since no information about workers Preference is given, we do not know which effect will dominate the other effect and therefore, we do not know what the not impact of increase in wage will be.

b. The boney will only have incorre effect The bony will make the workers sicher, thereby Making the wolker decrease no. of hours works. If in Part (o), the substitution effect and income effect are equal in magnitude, then there will be no change in the no. of how workers. - The . no. of hours worked will remain the Same at 2000 nowy. since the employer would be paying $5 cito on each hoor works, the cost to the employer of increase in wage would be $10,000 (€ 20000 $5) which is the same of the borug in Port b.