Question 1 a)
Suppose we have two accounting firms that exist within a competitive market place (i.e. their profit levels are zero). Firm 1 has the total cost function of TC1 = W +4H while firm 2 has the cost function of TC2 = W + H/2 where W is the wage rate offered and H is the number of weekly hours employees can work from home (assume a maximum of 40 weekly hours). Both firms also have fixed revenue amounts (i.e. these amounts do not change), where firm 1’s revenue is 50 and firm 2’s revenue is 30. If firm 1 currently offers H = 5 and firm 2 offers H = 20 what is the wage rate offered by both firms (recall that profit is revenue minus cost)?
Question 1 b)
The government has set out a new policy that all accounting firms must allow their employees to work a minimum of 15 hours each week at home. Given the cost functions and fixed revenue amounts mentioned above (and continuing to assume that profit levels are zero), will either firm be able to implement this new regulation?