Suppose a start-up company can operate from a traditional office space or from a virtual office in which there is no physical office location and the employees collaborate over internet connections from their individual homes. Shirking is more difficult to monitor under the virtual office plan. How would the efficiency wage and level of employment for the virtual office compare to the traditional office plan?
A) Efficiency wage and employment are higher.
B) Efficiency wage is lower, employment is higher.
C) Efficiency wage is higher, employment is lower.
D) Efficiency wage and employment are lower.

Question

Quizplus · Accepted Answer

Under virtual office plan shirking is more difficult to monitor, which means that there is a higher possibility of employees engaging in shirking activities. The higher possibility of shirking demands a higher efficiency wage to motivate the employees. Therefore, the efficiency wage under virtual office plan would be higher than that of the traditional office plan. However, since virtual office plan has lower overhead costs, it can afford to pay higher efficiency wages without incurring higher costs. As a result, it can attract more talented and dedicated employees without increasing the overall employment level. Therefore, the efficiency wage is higher, but the employment level is lower under virtual office plan compared to traditional office plan.

Suppose a Start-Up Company Can Operate from a Traditional Office