Question

If an employer’s behavior is supportive of the theory of efficiency wages, the employer would raise wages in an effort to …

(i) Increase work effort (ii) A decrease in the number of workers quitting (iii) Raise the quality of workers that apply for jobs at the firm

Consider the following daily production data for Davis Golf Balls, Inc. Davis Golf Balls, Inc. sells golf balls for $1 each. Use the following table to answer this question:

Labor (number of workers)	Quantity (golf balls per day)	MPL	VMPL at $1 per golf ball
0	0	-	-
1	175	175	175
2	325	150	150
3	450	125	125
4	550	100	100
5	625	75	75
6	675	50	50

Assuming Davis Golf Balls, Inc. is a competitive, profit-maximizing firm, how many workers will the firm hire if this company pays a wage of $150 a day?

4 workers

3 workers

2 workers

1 worker

Use the following table to answer the following question:

Labor (number of workers)	Quantity (golf balls per day)	MPL at 50 cents (golf balls per day)	VMPL at 50 cents per golf ball
0	0
1	100
2	175
3	225
4	250

Consider the following daily production data for Davis Golf Balls, Inc.  Davis Golf Balls, Inc. sells golf balls for 50 cents.  Assuming Davis Golf Balls, Inc. is a competitive, profit-maximizing firm, how many workers will the firm hire if this company pays a wage of $25 a day?

4 workers

3 workers

2 workers

1 worker

Answer 1

If an employer’s behavior is supportive of the theory of efficiency wages, the employer would raise wages in an effort to increase worker effort.

Answer: Option (A)

--------------------

Labor (number of workers)	Quantity (golf ball per day)	MPL	VMPL at $1 per golf ball
0	0	---	----
1	175	175	175
2	325	150	150
3	450	125	125
4	550	100	100
5	625	75	75
6	675	50	50

MPL = change in quantity / change in labor.

VMPL = MPL * Price of output.

In perfect competition, the optimal number of labor demand at the following point.

VMPL = Wage

=> VMPL = Wage = $150 corresponding to 2 units of worker.

Hence, the firm would hire 2 units of worker.

Answer: Option (C)

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Labor (number of workers)	Quantity (golf ball per day)	MPL at 50 cents (golf per day)	VMPL at 50 cents per golf ball
0	0	---	----
1	100	100	50
2	175	75	37.5
3	225	50	25
4	250	25	12.5

MPL = change in quantity / change in labor.

VMPL = MPL * Price of output.

In perfect competition, the optimal number of labor demand at the following point.

VMPL = Wage

=> VMPL = Wage = $25 corresponding to 3 units of worker.

Hence, the firm would hire 3 units of worker.

Answer: Option (B)