Question

You are the manager of a large but privately held online retailer that currently uses 17 unskilled workers and 6 semiskilled workers at its warehouse to box and ship the products it sells online. Your company pays its unskilled workers the minimum wage but pays the semiskilled workers $12.75 per hour. Thanks to government legislation, the minimum wage in your state will increase from $10.25 per hour to $10.75 per hour on July 24, 2017. Discuss the short-run implications of this legislation on your company’s optimal mix of inputs.

• You will increase your hiring of unskilled workers and decrease your hiring of semiskilled workers.

• You will increase your hiring of semiskilled workers and decrease your hiring of unskilled workers.

• You will not change your mix of semiskilled and unskilled workers.

Answer 1

The online retailer is hiring two type of workers - unskilled workers and semiskilled workers.

The otimal mix of workers is that mix where following condition is fulfilled -

MP_U/W_U = MP_S/W_S

Unskilled workers are paid the mnimum wage rate. Now, government has raise the mnimum wage rate.

As unskilled workers are paid minimum wage rate, this increase in mnimum wage rate will increase the wage rate for unskilled workers.

Due to this the ratio of marginal product of unskilled workers and wage rate of uneskilled workers will decrease.

Now, the condition would be as follows -

MP_U/W_U < MP_S/W_S

In such scenario, in order to achieve the optimal mix once again, retailer has to increase the hiring of skilled workers and decrease the hiring of unskilled workers.

Thus,

The correct answer is the option (2) [You will increase your hiring of semiskilled workers and decrease your hiring of unskilled workers].