Question

Suppose a project needs to hire 10 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.

1)Estimate the opportunity cost of hiring the workers.

2) draw diagram

3) state assumption

Answer 1

Project needs to hire 10 electricians

Initial wage = 60K/year

Currently employed = 480

Unemployed = 20

1.Opportunity cost is the value of the next best alternative or option.

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

We can estimate opportunity cost by assuming that for example if the pay is expecting to be raised from 60k/year to 65k/year and employers from 480 - 510 then :

65K - 60K = 5K

Opportunity cost for hiring the workers = 5K

2. Illustrated with the grapgh :

Supply of labour increases

  

3. The concept is based on the following Assumptions :

a) All labour to be homogeneous.

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

c) Perfect competition prevails in the market.

d) There prevails full employment of resources.