Question

4. A firm hires two workers to assemble bicycles. The firm values each bicycle assembled at $12. Alisha’s marginal cost of allocating effort to the production process is 2N, where N is the number of bicycles assembled per hour. Kyle’s marginal cost is 3N.

a) If the firm pays piece rates of $12 per bicycle assembled, what will be each worker’s hourly wage, and how many bikes will they each assemble in an 8-hour day?

Alisha’s wage:                                    # bikes assembled by Alisha:

Kyle’s wage:                                       # bikes assembled by Kyle:

b) Suppose the firm instead pays a time rate of $12 per hour and fires any worker who does not assemble at least 1 bicycle per hour. How many bicycles will each worker assemble in an 8 hour day?

# bikes assembled by Alisha:             # bikes assembled by Kyle:

c) Briefly explain the reason for the difference, if any, between your answers to (a) and (b).

d) If you own this firm, what is likely to influence whether you pay piece rate or time rate?

Answer 1