Question

Question 3 A travel channel film series of video clips in various cities in America. The demand for travel videos is uncertain: it is high 50% of the time and low 50% of the time. The firm hires labor in the city where it is filming, to help produce the clips. In a large city, the firm always pays $15/hour. It hires 10 workers when demand is low, and 30 workers when demand is high. In a small city, the firm always hires 20 workers. It pays them $10/hour when demand is low, and $20/hour when demand is high Assume that the demand curves are linear. As a consumer of labor, the firm cares about maximizing it's consumer surplus from the labor market. (a) What is the firm's expected CS in a big city? (Hint: For each demand curve (high and low), you need two points on the line in order to get the graph equation. This is contained in the above information.) (b) What is the firm's expected CS in a small city? Now suppose that, in addition to the above costs, firms also have to pay to rent an editing studio. This means that expected profits are ECS] -rent. In a large city, the rent is $30/hr. Travel channel owners are free to locate their firm in any city of their choice. (c) Predict what editing studio rents should be in a small city. Explain the economie reason behind your answer.

Answer 1

Questions : The demand for travel videos is high 50% of time and also low 50% of times, or in other words, high with probability and low with probability = 2 In high times, Large city hires 30 workers at wage rate $15 per hour. and small city hires a 20 workers at wage rate $20 per hour Then, the high demand curve will be the currve joining the two le points (30,15) and (20,20). say wage = pt and labor=&. PA 15 20-15 . 8 h 30 - 20-30 =DPH 42 - 30 = Q H+ 30 =D/gH=60-20 pt / High demand. $15 per for Similarly in low times, Large city hires and small city hires 20 workers at Then, if wage=ph and labor=as² lo cworkers at $10 per hous ph-10 15-10 84-20 10-20 = 2 =D2 p² - 20=- BL+20 =/8 = 40-2Ph Low demand. The cunkes are drawn in the following diagram. demand p 30 0 Gs of small city in High and low the demand. =AABFTA FDE es of large city in High - and low demand. = AFGH + A A C Gr. l 20 RB 156 10 TE 0' 10 20 30 40 60 a @ expeted cs of large city=cs Larse_ b (Cs in Low dd] + 2 Ces in high dd) = 12 x 12 x 10 x 5] + 1 x [ 1 ₂ 2 x 30x8 157 Expected [cs forge 125

Coggestions shell in (6) expected cs Small city = c5 small citu = L CCs in highde) + / 2 (GS in low dd) = **[ 1x 10x10]+2x[Ź x 10x10] smell Expected G5 = 50 ② Now, after introduction of rent, T = Profit= E(Cs) - vent. Thes, for Large country, Th E [cs Largez - rent = 125 - 30 Ith 95 also expect firm will Now, the the same of level profit at the small city also. They for small country TS - E[cs Small ] – rent = 100-rents Now, TS = t 2 = 100-rents = 95 rent s = $5 per hour The rent in small country should be $5 per hour. The reason is to equalize the profit whether the film is in small country or large country. Theis economiep rent would be the above revel.