Question

A firm hires two workers to assemble bicycles. The firm values each assembly at $12. Charlie’s marginal cost of allocating effort to the production process is 4N, where N is the number of bicycles assembled per hour. Donna’s marginal cost is 6N. a. If the firm pays piece rates, what will be each worker’s hourly wage? b. Suppose the firm pays a time rate of $15 per hour and fires any worker who does not assemble at least 1.5 bicycles per hour. How many bicycles will each worker assemble in an 8 hour day?

Answer 1

Answer part A

Firm values each assembly at $ 12

So for 1 assembly it will pay $12

For 2 it will pay $12*2=$24 and so on

Marginal cost of Charlie = 4N

So, for first assembly the MC will be = $4

For second = $8 and so on

Charlie assemble 3 bicycles as here firm’s value for each assembly = marginal cost of Charlie

Therefore, each hour so his hourly wage will be $36

Donna’s marginal cost = 6N

For first assembly the MC will be $6 for second $12 for third $18

So therefore Donna assembles 2 bicycles each hour and get $24

Part B

To get prevented from being fired every worker will assemble 1.5 bicycles each hour. Therefore in 8 hours they each worker will assemble 1.5*8 = 12 bicycles.