Following in the spirit of the labor market game described in Example 16.6, suppose the firms total

Question:

Following in the spirit of the labor market game described in Example 16.6, suppose the firm’s total revenue function is given by R 5 10l 2 l 2

, and the union’s utility is simply a function of the total wage bill:

U 1w, l2 5 wl.

a. What is the Nash equilibrium wage contract in the twostage game described in Example 16.6?

b. Show that the alternative wage contract wr 5 lr 5 4 is Pareto superior to the contract identified in part (a).

c. Under what conditions would the contract described in part

(b) be sustainable as a subgame-perfect equilibrium?

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