Question

Suppose a project needs to hire 50 electricians. At the initial wage of 60K/year (including benefits) 480 are currently employed in the local area and 20 are estimated to be unemployed. The MEBT (marginal excess tax burden ) is 0.2. After electricians are hired for the project, the local wage increases to 65K/year and the number employed locally increases to 510.

a) Estimate the opportunity cost of hiring the workers.

b) Draw a diagram to illustrate.

c) Explain any assumptions you make

Answer 1

a) Opportunity Cost = Return on Most Profitable Investment Choice - Return on Investment Chosen to Pursue

65K - 60K = 5K

Opportunity cost for hiring the workers = 5K

b) Illustrated with the grapgh :

Supply of labour increases

c) The concept is based on the following Assumptions :

1. All labour to be homogeneous.

2. A fixed proportion of labour is used in the production of all comodities.

3. Perfect competition prevails in the market.

4.There prevails full employment of resources.