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The VMP of each worker

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Workers start at firm A when they are 18. The VMP of each worker remains $18 throughout their work life.

Given the firm's concern that workers shirk, they start workers at $10 and increase the pay by $0.40 each year they are on the job. Assume that the firm does not have a pension plan and r=0 for all workers.

(i) For what ages will workers be paid above their VMP?
(ii) Show whether this firm opposes legislation prohibiting mandatory retirement for workers under 65.
(iii) At what age would they begin to oppose legislation?

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Solution Summary

This job assess if this case opposes legislation prohibiting mandatory retirement for workers under 65.

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VMPs of 10 workers in a hypothetical labor market

The following table describes the VMPs of 10 workers in a hypothetical labor market.

Worker VMP/hour
1 $10
2 $20
..
9 $90
10 $100

Further assume that Firm 1 pays a worker a piece rate and Firm 2 pays a time rate equal to $40/hour.

(a) How do workers sort themselves across firms?
(b) What happens if there is an increase in demand that increases the price of the firm's product by 10%?
(c) What is there is an increase in demand that increases the price of the product by 20%?

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