Imagine a firm trying to minimize its unit labour cost and a situation where the
ID: 1234555 • Letter: I
Question
Imagine a firm trying to minimize its unit labour cost and a situation where the employee actually responds to higher wages by putting more effort on the job. Moreover, the reservation wage of the employee (the minimum wage at which they are willing to work) is 15 dollars per hour. In fact, imagine the following relationship between output and the wage rate:wage per hour Output per hour
15 170
16 190
17 208
18 224
19 238
20 250
21 260
22 268
23 274
24 278
25 280
a) Should the firm pay its employee as little as possible in an attempt to make the most money? If not, what do you think would be the best choice for the firm in terms of wage level? Show your work (and feel free to provide a graph if you want).
b) Suppose the reservation wage increases to 17 dollars. How would this likely affect the situation and your analysis in a) (would the answer change? If so, how?).
Explanation / Answer
Generally the wage rate will equal the marginal revenue product of the worker. So if as a result of hiring a worker you are able to get x more dollars of revenue per hour he works, it makes sense to pay him x dollars. So therefore, paying an employee the minimum wage he will work for is not necessarily the best option, if by paying him more you will realize more revenue than you will have to pay out in wages. So if the marginal revenue product was greater than or equal to 17 it would still pay to hire the employee even if the reservation wage went up to $17. If a hiring a person will result in more revenue that you have to pay him ,it pays to hire him regardless of his demographics. Discrimination still endures, though, because people have a perception that some groups are better and more productive than others.