Question

Consider a worker that ranks combinations of employee benefits (B) and wages (W) according to the utility function: U(B, W) = B αWβ , where α and β are positive constants and U is the satisfaction level. If firms do offer benefits, wages must be reduced by 95 cents for every dollar of benefits offered, in order for the firm to continue to break even. Suppose that a firm currently offers a compensation package of $40 in benefits and $60 in wages. Assume that an individual’s preferences are such that α = 1 and β = 2 (i.e.: they give more weight to wages than to benefits in the process of ranking compensation packages).

Answer 1

Answer:

It is a problem where firm is providing compensation package consists of benefit (B) and wages (W). Utility of a customer is expressed by the understated utility function-

Here Alpha and beta are weight factor. satisfaction from each dollar of B is alpha times and from W is beta times. As per problem, alpha is 1 and beta is 2. So wage is providing double satisfaction than one dollar benefit.