Problem

1. a firm's workforce is on average 20 years away from retiring. The firm's workers Suppose could find similar work in other companies earning $40,000 per year. Also, suppose that workers who shirk their work have a .30 chance of being dismissed.

a. For simplicity, assume that workers could find a job in an alternative company with no search costs. What would the firm have to pay to impose shirking costs of $60,000 on the average worker during his (her) work life expectancy? Show your work.

b. Find three salary-probability of dismissal combinations that would yield shirking costs of $60,000 for the average worker over his (her) work life expectancy.

2. Suppose a firm is considering installing cameras and using spy software on the computers at the office to monitor its workers in addition to hiring additional supervisors. The firm estimates that increasing the probability of catching workers who shirk by .01 costs the company $10,000 per year. For example, in the problem above when going from 0.30 to 0.31, it would cost the firm $10,000 per year. How much would the firm have to spend in order to impose shirking costs of $75,000 on its average worker? Show your work. Assume that

· the firm's work force is on average 20 years away from retiring

· that the firm's workers could find similar work in other companies earning $40,000

· that the company currently pays its workers $42,000

· and that the current probability of catching workers who shirk is 0.30.