Answer to Question #88304 in Microeconomics for Frazer Ariki

Question

A. How can both the union and firm be better off by bargaining over the wage rate and employment rather than just the wage rate? Explain with the help of the efficient contract model.

B. If we assume that a union’s utility only depend on the wage rate and not the level of employment, what will be the outcome under the efficient contracts model.

Answer 1

A. Under the consideration of efficient contracts model, the wage and employment arrangement is done where one individual is made better off without making the other worse off. The unions as well as the firms will be better off while bargaining over wage rate and employment providing sufficient value for both.

B. If we assume that a union’s utility only depend on the wage rate and not the level of employment, then under the efficient contracts model the union will try to take the highest possible price to gain the highest possible utility.