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In: Economics

A firm can use either high skilled or low skilled workers in production. One high skilled worker can produce as much as 2 low skilled workers.

A firm can use either high skilled or low skilled workers in production. One high skilled worker can produce as much as 2 low skilled workers.

a.Draw isoquants for a production process, the inputs of which are high cost and low cost workers. (Hint: Marginal rate of technical substitution is constant)

Unions represent high skilled workers. They are only concerned about the level of employment and wages for high skilled workers. The wage for high skilled workers is $10. Low skilled workers are not represented by the union, and their wage is $4. The government is considering introducing a minimum wage of $5.01.

b.What will be the union’s position on the minimum wage increase and why?

Solutions

Expert Solution

a) One high skiled worker can produce as much as 2 lw skilled worker.

the marginal product of high skilled worker= 2* Marginal product pf low skilled workers.

Thus,

MRTS= MPhs/ MPls =2/1 = 2

Thus, the slope of the isoquanti is constant and is equal to 2.

This imples that high skilled and low skilled workrs are perfect substitues.

Diagramatically it can be shown as:

b) The wage of the high skilled workers is $10, the wages of the low skilled workers is now increased to $5.01

The ratio of the wages is now, 10/5.01 =1.99

As the ratio of the wages is lower tha 2, which is less than MRTS, the budget line would become less steeper than the isoquant, and as high skilled and low skilled workers are perfect substitues, the producers would substitute the low skilled labours completely with the high skilled labours.

Rahul Sunny answered 2 years ago
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