Suppose it takes a total of 100 hours to produce a car (mathematically speaking,
ID: 1198903 • Letter: S
Question
Suppose it takes a total of 100 hours to produce a car (mathematically speaking, this means one hour of work “produces 0.01 cars”). If the average wage in car making is $50 per hour, and each car needs $1,000 worth of inputs other than labor, C1: What is the unit labor cost of cars? C2: If both labor productivity and wages double, what happens to unit labor costs? C3: If cars are selling for $10,000, how much profit is generated per car? C4: If the producer can double production speeds by increasing wages to $80 per hour, how much profit will it make per car at this price for cars?
Explanation / Answer
C1. Unit labor cost of cars is the cost of labor used in producing 1 car.
Cost of labor = 100 hours * $50 per hour = $5,000 per car
C2. If labor productivity doubles, then the car can be produced in 100/2 = 50 hours
and wage = 2 * $50 = $100 per hour
Unit Labor costs = 50 hours * $100 per hour = $5,000 i.e remain unchanged
C3. Profit per car = Sales price - Unit Labor cost - Input costs = $10000 - 5000 - 1000 = $4000 per car
C4. Production speed doubles ie. car is produced in 50 hours
Unit labor cost = 50 hours * 80 per hour = $4,000
Profit = 10000 - 4000 - 1000 = $5,000 per car