Answer to Question #158061 in Macroeconomics for Kimsteve

Question

Wage Bargaining: Reconsider the wage bargaining game from class, where pilot's outside option (s_o) is private information, and United believes that it is uniformly distributed on (0,10). As in class, assume that United makes a take-it-or-leave-it wage offers (s) to the pilots. If the pilots reject the offer, United goes bankrupt.

(a) Calculate the optimal offers for profits (before salaries) л = 16. Are there any mutually beneficial trades that do nor occur in equilibrium?

(b) Calculate the optimal offer (s) for profits (before salaries) л = 20. Are there any mutually beneficial trades that do nor occur in equilibrium? Discuss.

Answer 1

(a) The optimal offers for profits (before salaries) should be between 0 and 10, but we need additional information to find the exact amount. There may be mutually beneficial trades that do nor occur in equilibrium.

(b) The optimal offers for profits (before salaries) should be between 0 and 10, but we need additional information to find the exact amount. There may be mutually beneficial trades that do nor occur in equilibrium.