Question

2. Assume that workers, when they evaluate a job, care about two things: wages and job instability.  Wages are a good, and job instability is a bad.  There are two types of firms: one type can provide more stability at relative little cost; the other finds it very costly to guarantee stability.

       a) On a graph of wages and job instability, show the zero isoprofit curves for the two

       kinds of firms, and the offer curve between job instability and wages.  Why do we

       assume that firms will have zero economic profits?

       b) Universities tend to offer a lot of job security, through tenure.  Some have criticized

       tenure, saying that it is too costly to provide so much job stability.  What will happen to a

       university’s labor costs if it stops offering tenure?  How will the pool of applicants for

       jobs change?

       c) Say that the sorts of firms that offer less stable jobs become more profitable because of

       the information age?  What will happen in the diagram for this problem?  Will there be

       more workers in unstable jobs?  What will happen to the compensating differential for

       job instability?

Answer 1