The effort of a firm’s workers depends on their real wage according to the following schedule: Real Wage (w) 16 17 18 19 20 21 Effort (E) 10 13 18 22 25 26 The marginal product of labor is MPN E (400 4N) 30 1 = ⋅ ⋅ − , where E is effort level and N is number of workers employed.
(i) Using the table, calculate the effort-wage ratios and hence determine the efficiency wage. How many workers should the firm hire?
(ii) Suppose an adverse productivity shock reduces the marginal product of labor to MPN = 30 1 ⋅ E ⋅( ) 360− 4N . How would your answers to parts (a) change?
(iii) Draw diagram(s) and explain.
(i) The efficiency wage is where the E/W is maximum which is 1.25 so the efficiency wage is 20.
The firm will hire at which W=MPN
N=94 so the firm will hire 94 workers
(ii) There would be no effect on the efficiency wage
But the employment of workers will fall