Suppose a Firm Overpays Its Workers at the Start of the Job

question 2

Multiple Choice

Suppose a firm overpays its workers at the start of the job, and then the firm slowly lowers wages over time until eventually the firm pays the workers considerably less than the worker's marginal product of labor. What prevents this "reverse of a delayed-compensation scheme" from being implemented?

• A)Workers prefer wages to increase over time.
• B)The firm would fire the worker as soon as the worker's value of marginal product exceeded the worker's wage.
• C)Workers would leave the job as soon as the firm tries to pay the worker less than his or her value of marginal product.
• D)The firm would need to enforce a mandatory retirement age which is illegal in the United States.
• E)The workers would never have an incentive to invest in general training.

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Definitions:

Expected NPV

The anticipated Net Present Value of a project or investment, considering the potential outcomes and their probabilities.

Standard Deviation

A statistic that measures the dispersion of a dataset relative to its mean, widely used to quantify the volatility of financial instruments.

Simulation Analyses

A statistical method that attempts to predict the outcome of a decision or investment by representing possible scenarios and their impacts.

Incremental Cash Flows

The additional cash flows from operations that a business generates from taking on a new project.