Bruno's Profit Incentive to Decrease Angela's Free Time When MRS < MRT
When Angela works for fewer than eight hours, resulting in more than 16 hours of free time, her indifference curve is flatter than the feasible frontier. This indicates that her Marginal Rate of Substitution (MRS) is less than the Marginal Rate of Transformation (MRT). In this scenario, Bruno can increase his profit by reducing Angela's free time. The reason is that the extra grain produced from an additional hour of her work is greater than the amount of grain needed to compensate her and keep her on her reservation indifference curve (IC1).
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Ch.5 The rules of the game: Who gets what and why - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
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Bruno's Profit Incentive to Increase Angela's Free Time When MRS > MRT
Bruno's Profit Incentive to Decrease Angela's Free Time When MRS < MRT
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A powerful landowner controls a plot of land and can dictate the working hours of a tenant farmer. The tenant has a 'survival threshold' which represents the minimum combinations of grain and free time they are willing to accept. The landowner's goal is to maximize their own share of the grain harvest while ensuring the tenant remains at this survival threshold.
Currently, the tenant is working a certain number of hours. At this specific allocation:
- The rate at which an additional hour of the tenant's labor can be transformed into grain is 3 bushels.
- The rate at which the tenant is willing to give up an hour of free time for more grain (while staying on their survival threshold) is 2 bushels.
What should the landowner do to increase their own share of the grain?
Profit Maximization with a Participation Constraint
Optimizing Surplus under a Participation Constraint
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A landowner seeks to maximize their share of grain from a tenant farmer, who must be kept on their reservation indifference curve (their minimum acceptable outcome). If, at the current allocation, the rate at which the tenant's labor produces additional grain is greater than the rate at which the tenant is willing to trade free time for that grain, the landowner can increase their own share by granting the tenant more free time.
Surplus Maximization under a Participation Constraint
A landowner seeks to maximize their share of a grain harvest produced by a tenant farmer. The landowner can determine the tenant's work hours but must ensure the tenant receives a combination of grain and free time that meets their minimum acceptable living standard. At the current allocation of work hours, the following is true:
- The rate at which an additional hour of the tenant's labor is transformed into grain is 2 bushels.
- The rate at which the tenant is willing to give up grain for an additional hour of free time (while maintaining their minimum living standard) is 4 bushels.
To increase their own share of the grain, what action should the landowner take?
A landowner seeks to maximize their share of a grain harvest produced by a tenant farmer. The landowner can dictate the farmer's working hours but must provide the farmer with a combination of grain and free time that meets the farmer's minimum acceptable living standard. Which of the following scenarios describes the allocation that maximizes the landowner's share of the grain?
A landowner is deciding on the work hours for a tenant farmer. The landowner's goal is to maximize their own share of the grain harvest, while ensuring the tenant's combination of grain and free time keeps them at their minimum acceptable living standard. The landowner is considering three potential allocations:
- Allocation X: The rate at which an hour of the tenant's labor can be transformed into grain is 4 bushels. The rate at which the tenant is willing to trade an hour of free time for grain is 2 bushels.
- Allocation Y: The rate at which an hour of the tenant's labor can be transformed into grain is 3 bushels. The rate at which the tenant is willing to trade an hour of free time for grain is 3 bushels.
- Allocation Z: The rate at which an hour of the tenant's labor can be transformed into grain is 2 bushels. The rate at which the tenant is willing to trade an hour of free time for grain is 4 bushels.
Which allocation should the landowner choose to maximize their share of the grain?
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Learn After
A landowner is considering changing the work hours of a tenant farmer. At the current arrangement, the farmer produces 2 additional bushels of grain for every extra hour worked. To willingly accept working one extra hour, the farmer would need to be compensated with at least 1.5 bushels of grain to feel no worse off. From the landowner's perspective, what is the profit-maximizing course of action?
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A landowner and a tenant farmer are discussing the farmer's work hours. At their current agreement, the marginal rate at which the farmer can transform an hour of free time into grain is greater than the marginal rate at which the farmer is willing to substitute free time for grain to maintain the same level of satisfaction. Why does this situation create an incentive for the landowner to propose that the farmer work more hours?
A profit-maximizing firm is deciding whether to adjust an employee's work hours. The firm compares the value of the output produced by an additional hour of work against the value of goods required to compensate the employee for that hour of lost free time. Match each scenario describing this comparison to the firm's most profitable course of action.
A firm observes that for a particular employee, the value of the goods produced in an additional hour of work is less than the value of the goods the employee would require as compensation to willingly give up that hour of free time. Given this, the firm can increase its profits by increasing the employee's work hours.
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