1: Some workers in the economy are paid a flat salary and some are paid by commission. Which compensation scheme would require more monitoring by supervisors? In which case do firms have an incentive to pay more than the equilibrium level (as in the worker-effort variant of efficiency-wage theory)? What factors do you think determine the type of compensation firms choose?

2: Consider an economy with two labour markets, neither of which is unionized. Now suppose a union is established in one market. (Each part require a diagram; you may draw both in part a) and write only the explanation in part b)

a.Show the effect of the union on the market in which it is formed. In what sense is the quantity of lab our employed in this market an inefficient quantity?

b.Show the effect of the union on the nonunionized market. What happens to the equilibrium wage in this market?