There are two types of workers. Type A workers are very concerned about noise and have the following utility function Utility (U)= W-2N. Where W is wage and N is the amount of noise. Type B workers don’t care as much about noise, they have the following utility function U=W-.5N. There are two types of firms in the world (firm 1 and firm 2). Both firms generate 6 units of noise and both firms are willing to pay $16 an hour in total expenditures on workers (wages plus the costs, if any, associated with reducing the noise). It costs firm 1 $1 to reduce the first 3 units of noise, the next unit costs $1.50, then $2.00 for the 5^th unit, then $2.50 for the 6^th unit. It costs firm 2 $3 reduce each unit of noise.

1. Which worker will work for which firm? Why? How much noise will each firm emit? How much utility will each worker get?
2. Now the government passes a law which say the most noise a firm can emit is 4 units. Which worker will work for which firm? How much noise will each firm emit? How much utility will each worker get? Is anyone worse off? Explain.

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A Worker A will work for ... View the full answer