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?