Consider the model of labor pooling, with each firm locating either in an isolated site or in
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Consider the model of labor pooling, with each firm locating either in an isolated site or in a cluster with other firms. Suppose that good times and bad times are equally likely (50% chance of each occurring). The table shows the demand curve and wages in different times and locations.
a) Calculate the benefit of being in a cluster when times are good.
b) Calculate the cost of being in a cluster when times are bad.
c) Calculate the expected value for a firm locating in a cluster and compare it to the expected value of a firm in an isolated site.
d) Calculate the expected value of wages for a worker in an isolated site and for a worker in a cluster.
| Equilibrium Wage | ||
| Isolated | Cluster | |
| Good Times (high demand): W = 55 - 0.5L | $40 | $30 |
| Bad Times (low demand): W = 35 - 0.5L | $20 | $30 |
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