This problem illustrates the shirking model of efficiency wages. In this version of the model, if workers shirk, nothing gets produced. The employer must pay a wage high enough to keep workers from shirking. Let $20,000 be the wage other employers are paying. Workers value a year’s worth of shirking at $5,000 (for example, this might be their value of sleeping on the job). If the workers shirk, they have a 20 percent chance of getting caught and fired. If fired, they lose the present value of all the future wage premiums they would have earned had they stayed with the firm. Assume that the present value of the job equals 10 times the wage premium. Since the worker has only a 20 percent chance of suffering this loss, the expected value of this loss is 0.20 times the present value of the wage premium.

a. What is the lowest wage the firm can pay and not have workers shirk?

b. What will happen to the wage if the firm begins to monitor workers more closely, increasing the chance they will catch shirking workers?

c. What will happen if a worker does not plan to stay with the firm long, such that the present value of any premium decreases?