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C2 (10 points) Show in the following algebraic example the
magnitude of the efficiency gain. Assume as before that
$VMP = 100 − 2 · L and the union’s utility function is U = w · L,
but also
that the competitive wage (WC)=30
If the firm and employer have negotiated the “efficient” contract
$w = 40 and L = 40 (as in B). How much would they jointly gain by
instead choosing a strongly efficient contract (one that permits
severance pay to laid off workers?
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