What is the expected wage in the city

Reference no: EM13185965

In China, three members of a family own a small business. They all work on the firm and they can hire up to two more people to work in their business. Each worker is paid $300. The total output per year depends on the number of members working in the business that year. Total annual income (or value of output) is represented by the following chart.

Number working on farm

Total Business Output (in $)

900

1700

2300

2700

2900

Each member of the family has the opportunity to migrate to the nearest city where there are two different types of jobs. Informal jobs are available to everybody and pay $200. Formal sector jobs are more difficult to get and pay $800. The probability of finding a job in the formal sector is 60%. For questions A-C, suppose that there are no costs of migration.

A) Suppose all three members of a family were to work in the business. How many workers should the family hire to maximize business revenue?

B) What is the expected wage in the city?

C) Show that the business maximizes total family income by sending two of their family members into the city, letting one stay on the farm and hiring two workers.

Reference no: EM13185965

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