An employer faces two types of employees. Regular workers at 90% of the population and generate $75,000 in productivity. Exceptional workers are 10% of the population and generate $100,000 in productivity. Employees know their types and reject salaries below their productivity. If employer offers a salary equal to the average productivity in the population, what will be the employer’s per-employee profit? How can this be fixed?

An employer faces two types of employees. Regular workers at 90% of the population and generate $75,000 in productivity. Exceptional workers are 10% of the population and generate $100,000 in productivity. Employees know their types and reject salaries below their productivity. If employer offers a salary equal to the average productivity in the population, what will be the employer’s per-employee profit? How can this be fixed?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 2MC

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