Question

Suppose that a firm is considering hiring a worker and providing the worker with general training. The workers MPL is $100 during the training period, but rises to $200 in the post-training period. The workers wage is $100 during the training period, the cost of training is $50 and the discount rate is 10 percent. What is the most that a profit-maximizing firm can afford to pay the worker in the second period?

Answer 1

ANSWER:

MPL in period 1 is $100 and will rise to $200 in post training period

Worker wage is $100 during training period and $50 for training cost

then if we use consumption theory on the same line for marginal products

C0 +C1/(1+r) =Y0 + Y1/(1+r)

MPL is $100 today and wage also equals to $100

Then firm should not pay mpre than MPL of wokrer to earn non negative profits.FIrm is going to pay $200 next period as a wage hence need to discount to present value therefore Present Value of 2nd year Wage = 200/1.1 =181.81

imputing these values into equation we get

$100+$50 (Lets assume training expenses are like services provided by firm and counted as a consumption of worker

150+C1/(1+0.1) = 100+200/(1+0.1)

150+C1/(1.1) = 100+200/(1.1)

50 =200-C1/(1.1)

50*(1.1)=200-C1

55=200-C1

C1=145 a firm can afford to pay atleast

FV = C0 (1 + r)^n

FV = 150(1+0.1)^2

FV = 150*.1.21

FV = $181.5

If we finnd FV of 181.5 that is LESS than $200

Hence firm could be able to