Question

What is the opportunity cost for a company paying a worker $15? Can the company continue to pay $15/hr if the market wages are $20? Explain why and how.

Answer 1

The opportunity cost for $15 paid in wages is the best alternative in which the money could be invested in. It could be either invested in acquiring more capital or put in a bank to gain interest. Suppose the employer puts the amount in bank instead of paying the wage. The opportunity cost of paying the wage is the interest foregone on bank deposit. Had the employer invested it in capital, the opportunity cost will be the returns to the capital in terms of the additional profits earned through the investment in capital.

If the market wages increase to $20, there will be surplus demand for labour at $15. This is because the workers can now get paid $20 for the same work at another firm and nobody with the required qualifications will want to work at $15 with the firm. Therefore, in a competitive market, the firm will be unable to hire workers at $15.