Question

An employee of a firm has a job where the employee can easily adjust the number of hours they work for the employer per year. The employee is currently payed $40 per hour and will work 2000 hours in 2017. The employer had a good year in 2017 and is considering two changes in the employee’s compensation for 2018.

a) Suppose the employer decides to raise the employees wage to $45 per hour. Explain why it is unclear whether the wage change will cause the employee to choose more or less work in 2018. (Note: The ability of the firm to change wages means this firm is not in a competitive labor market, but this has no impact on the worker’s decision) (1 point)

b) The other alternative the firm is considering is paying the employee a $10,000 bonus, but not changing the wage. Explain how this will change your answer to (a) about how much the employee works in 2018. Explain how it is possible both options cost the employer the same amount of money (1 point)

Answer 1