Nazarbayev University

ECON 328

ECON 328: LABOR ECONOMICS Assignment 4 – Answer Key 1. (FALL 2015 MIDTERM II QUESTION) a. Since the training is firm specific, the worker's marginal productivity outside of the firm remains $40 and the firm pay the same after the training; w = $40. The wage during the training period needs to match with the outside option $40 since the training does not bring any increase in the future wage. Since the firm will benefit from the training in the form of increased productivity, the firm should provide the training in week 1. Profit from training= -wage-training cost + remaining weeks*(productivity-wage) = -40-500+(52-1)*(65-40)= -540+1275=$735. b. IMPORTANT: For this part, I assume worker only cares about his earnings in the first 52 weeks. In other words, worker’s yearly discount rate is 0 so that (s)he does not derive any utility from wages after 52 weeks. If the training is general, the worker's marginal productivity outside of the firm will increase to $65 after the training. If the firm pays less than $65 after the training, the worker will quit and find another job at