Question

Differences in productivity are usually the major force behind differences in wages and unit labor costs. Suppose that a single unskilled worker at a pottery factory in Mexico can produce 1 mug per hour. By comparison, suppose that a single unskilled worker at a pottery factory in the United States can produce 15 mugs per hour because more and better machinery generates higher labor productivity. The Mexican mugs and the American mugs are identical in quality and durability and sell for the same price. The daily minimum wage in Mexico is 70 pesos per day for an 8-hour work day, and the exchange rate between Mexican pesos and U.S. dollars is 10 pesos per dollar. The federal minimum wage in the United States is $7.25 per hour.

Instructions: Round your answers to 3 decimal places.

a. If unskilled pottery workers are paid the local minimum wage in both countries, how much is the labor cost per mug for mugs produced in Mexico?

       For mugs produced in the United States?

b. With regard to mug production, how much higher are labor costs per hour in the United States?

c. With regard to mug production, how much higher are labor costs per unit in Mexico?

d. Do higher labor costs per hour always imply higher labor costs per unit?

      (Click to select)  No  Yes

e. If firms with lower labor costs per unit expand, while those with higher labor costs per unit contract, in which country will mug-making firms be increasing in size and hiring more employees?

      (Click to select)  The United States  Mexico

     If unskilled pottery workers relocate to where they can find jobs, to which country will they be moving?

Answer 1

Given - Mexico
= 1 mug per hour per labour
= 70 pesos per day for eight hours

- America
= 15 mugs per hour per laboour
= $7.25 per hour

- exchange rate between Mexican pesos and U.S. dollars is 10 pesos per dollar
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a) (1) labor cost per mug for mugs produced in Mexico = 8.75 pesos

One worker produces one mug in one hour and gets paid 70 pesos for 8 hours. Thus we need to calculate wages per hour to get labour cost of one mug = 70/8 = 8.75 pesos
Thus the worker gets paid 8.75 pesos for one hour and he produces one mug in one hour

(2) Labour cost for one mug produced in the United States = $2.069
In America one worker produces 15 mugs in one hour and gets paid $7.25 per hour
Thus cost of producing one mug = number of mugs/labour cost per hour
                                          = 15/7.25 = $2.069

b) Labour cost per hour in Mexico as calculated in ans (a) = 8.75 pesos
Labour cost per hour in United states = $7.25

Exchange rate between Mexican pesos and U.S. dollars is 10 pesos = 1 dollar
Therefore, 8.75 pesos = lets say X
Now by cross mutiplying we get X = 1*8.75/10 = 0.875
So we get 8.75 pesos = 0.875 dollars

Therefore, labour cost per hour in Mexico = $0.875
Labour cost per hour in United states = $7.25

Thus, we see that the labor costs per hour in the United States is higher than labor costs per hour in Mexico by $6.375 ( 7.25-0.875)

c) Labor costs per unit of mug in Mexico as calculated in ans (a) = 8.75 pesos = $0.875
As we know that 8.75 pesos = 0.875 dollars
Labour cost for one mug produced in the United States = $2.069

Thus the labor costs per unit in Mexico is lower than the labour costs per unit in United States by $1.194 (2.069-0.875)

d. Do higher labor costs per hour always imply higher labor costs per unit?
Ans: Yes. As seen in answers for questions b and c.

e. If firms with lower labor costs per unit expand, while those with higher labor costs per unit contract, in which country will mug-making firms be increasing in size and hiring more employees?

Ans: Mexico.

As the labour costs interms of dollars is lower in Mexico.

- If unskilled pottery workers relocate to where they can find jobs, to which country will they be moving?

They will move to U.S as the minimum wages per hour is higher in U.S compared to Mexico.