Mr. Barnes operates a power plant in the local market. His marginal revenue of average employee effort level is: MR(e) = 25 - e. The marginal cost of effort to Mr. Barnes is: MC(e) = w. Employees set their effort level according to: e =
, where
is the average wage at all other jobs in the local market. Currently, this average is $7.50. If Mr. Barnes pays a wage rate of $7.50, is he maximizing profits? If not, what wage rate should Mr. Barnes pay?

Question

Mr. Barnes operates a power plant in the local market. His marginal revenue of average employee effort level is: MR(e) = 25 - e. The marginal cost of effort to Mr. Barnes is: MC(e) = w. Employees set their effort level according to: e =  
, where  
is the average wage at all other jobs in the local market. Currently, this average is $7.50. If Mr. Barnes pays a wage rate of $7.50, is he maximizing profits? If not, what wage rate should Mr. Barnes pay?

Quizplus · Accepted Answer

The Answer of Mr. Barnes operates a power plant in the local market. His marginal revenue of average employee effort level is: MR(e) = 25 - e. The marginal cost of effort to Mr. Barnes is: MC(e) = w. Employees set their effort level according to: e =  
, where  
is the average wage at all other jobs in the local market. Currently, this average is $7.50. If Mr. Barnes pays a wage rate of $7.50, is he maximizing profits? If not, what wage rate should Mr. Barnes pay?

Mr Barnes Operates a Power Plant in the Local Market