1.You are a manager of a firm that sells cotton at a price of $0.50 per pound. Renting one more cotton gin machine (see picture) will increase your firm's output by 200 units per day. Employing one more full-time worker will increase your firm's output by 100 units per day.

a. What is the most you should be willing to pay to rent one more cotton gin machine for one day?

b. What determines whether or not you actually have to offer that much to the owner of the machine to induce him to rent his machine to your firm?

Explain your answers.

2.Under the Texas Back to Work program, Employers can offset the costs associated with hiring and training new workers. This wage-subsidy program is funded by the Texas Legislature and administered through 28 Texas workforce boards.

When private-sector employers hire from a qualified pool of unemployed Texas workers, the employer is eligible to receive $5 per hour to subsidize part of the wages paid to the newly hired worker.

Discuss the implications of the Texas Back to Work program on a potential worker that values his own time at $12 per hour. Suppose there are several potential employers whose value of marginal product for that worker is $9 per hour for up to 40 hours per week.

In particular, does the subsidy increase the employment of the potential worker? Does the subsidy increase the happiness of the potential worker? Is the subsidy a good idea?