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V. (Subsidy and Minimum Wage) In the labor market, suppose there are two workers, A and B, and two rms, X and Y. W'orker A
V. (Subsidy and Minimum Wage) In the labor market, suppose there are two workers, A and B, and two rms, X and Y. W'orker A is currently hired by rm X at a wage rate of MIX 2 1 an hour, worker 13 is hired by rm Y at a wage rate of my 2 1/2 an hour. Firm X requires a particular skill that only worker A has; while rm Y does not require any particular skill. The workers obtain utility from leisure (i?) measured in hours and general goods (9) measured in money, represented by the utility function: 0'03, 9) = 9- They have 16 hours a day for either leisure or work, as such, they can choose their consumption on leisure E and their labor supply 16 1?. The price of general goods is normalized to l. 1) 'What is the consumption level of general goods for each worker? 'Nhat is the utility of each worker? 2) Suppose the government offers a subsidy 4 a day to any worker working for rm Y. Discuss the impact of this policy on the worker's labor supply and utility. 3) What is the maximum subsidy to workers working for rm Y, at which worker A prefers to work for rm X over rm Y? 4) Instead of offering subsidy, suppose the government imposes the minimum wage rate of g = 3/4. lWhat is the worker B's labor supply and utility? Discuss the impact of the minimum wage policy compared to the subsidy to worker B
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