Question 11: The Firm-Worker Relationship

Imagine you are going to start your own business, and in the production of your good or service, you will need to hire labour (workers). You will not be able to monitor your workers perfectly. The following diagram shows the profit-maximising combination of effort and wages, given the prevailing labour market conditions and the workers' incentives to give effort:

Answer the following questions:

a.) In your own words and with reference to the marginal rate of transformation, explain whether you would want a flatter or a steeper best response curve from your worker. [4 points]

b.) Does the labour discipline model show that it is possible for firms to increase the effort of workers without paying a higher wage? Explain your answer in your own words. [4 points]

c.) In your own words, explain what would happen to the worker's employment rentandthe labour discipline model above if the level of unemployment suddenly rose. Make explicit use of the elements of the diagram in your answer, and comment on the expected profit of the firm. [6 points]

d.) In your own words, explain what would happen to the worker's employment rentandthe labour discipline model above if monitoring workers became more difficult. Make explicit use of the elements of the diagram in your answer, and comment on the expected profit of the firm. [6 points]

Lower cost of effort 1 (but infeasible) Minimum feasible cost Worker's best response curve D 0.7 Higher cost of effort J Effort per hour, e 0.5 MRS = MRT 18 24 Reservation wage Hourly wage, W ($)