Question

In: Economics

Suppose that low-skilled workers employed in clearing woodland can each clear one acre per month if...

Suppose that low-skilled workers employed in clearing woodland can each clear one acre per month if each is equipped with a shovel, a machete, and a chainsaw. Clearing one acre brings in $1,300 in revenue. Each worker’s equipment costs the worker’s employer $235 per month to rent and each worker toils 40 hours per week for 4 weeks each month. Instructions: In part a, enter your answer as a whole number. In parts b-e, round your answers to 2 decimal places. a. What is the marginal revenue product of hiring one low-skilled worker to clear woodland for one month? How much revenue per hour does each worker bring in? c. If the minimum wage were $8.03, would the revenue per hour in part b exceed the minimum wage? If so, by how much per hour? d. Consider the employer’s total costs. These include the equipment costs as well as a normal profit of $50 per acre. If the firm pays workers the minimum wage of $8.03 per hour, what will the firm’s economic profit or loss be per acre? The firm's per acre will be: e. At what value would the minimum wage have to be set so that the firm would make zero economic profit from employing an additional low-skilled worker to clear woodland?

Solutions

Expert Solution

a) The marginal revenue would be $1300, which the woodland would get after clearing an additional acre of land.

b) The revenue brought in by worker per hour would be given as the Total revenue generated from one acre/ Hours by worker

Revenue per hour= 1300/(4*40)=1300/160=$8.125=$8.13

c) If the minimum wage is $8.03, the wage exceeds the minimum wage by 8.13-8.03=$0.1

Yes, it exceeds the minimum wage by $0.1

d) The profit or loss would be determined as Revenue- costs

Revenue=$1300

Costs=$235+50+8.03*160=$1569.80

Since costs are higher than revenue, the answer would be loss.

Loss= 1569.8-1300=$269.80 per acre

e) If the firm wants to make zero profits, then it would be determined by excluding the wage earnings as

Total revenue=$1300

Total cost (excluding wages) per acre=$235+50=$285

Revenue after the above costs=1300-285=1015$

This would be the wage earnings given 160 hours of labour.

So wage =1015/160=6.343=$6.34

The minimum wage where the firm enjoys zero economic profit=$6.34

(You can comment for doubts)

Rahul Sunny answered 2 years ago
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