Question

Tom is a full time lecturer at a private higher education institution and is considering a career in carpentry . He wishes to pursue a career in carpentry which he has studied part time and is now equipped to take on clients. In his current position he earns a rate of R1000per day and if he were to pursue a career in carpentry he would earn R800 per day. Due to the flexibility of the employment conditions at the higher education institute he works for. Tom can negotiate the number of days he works at and will receive a rate of remuneration based on the number of days worked.

1.1 construct a production possibility frontier to illustrate Toms earnings potential between the two careers if initially he was not working as a carpenter then he worked one week per month then two weeks then three weeks and finally four weeks per month assuming only four weeks in a month construct a production possibility frontier toms earning potential between the two careers if initially he was not working as a carpenter, the he worked one week per month, then two then three and finally four weeks per month assuming the month only have four weeks

1.2 Discuss the underlying assumption of the shape of the above drawn diagram and comment on how likely this could be true with respect the above scenario 1.3 discuss a factor that would lead to an outward shift of the diagram drawn in 1.1 and illustrate this on the diagram drawn.

1.4 discuss a factor that could lead to an inward shift of the curve drawn.

1.5 in the labour market for carpenters the current market clearing wage rate is R800 per day. with the aid of a diagram discuss the welfare effects of government intervention in the form of legislation that sets the minimum wage rate for a carpenter at R1000 per day.

Answer 1

Answer:

1.1 production possibility frontier to illustrate Toms earnings potential between the two careers if initially he was not working as a carpenter then he worked one week per month then two weeks then three weeks and finally four weeks per month:

If he works 30 days at installation his total income is 1000*30 = 3000.

If he works 30 days as carpenter his total income is 24000

The PPF is linear combination of these two points as given in following figure.

Figure:

1.2 underlying assumption of the shape of the above drawn diagram:

The PPF is a negative straight line giving the fact that the opportunity cost of choosing carpentry over lecture is constant and equals to 1.25 says of lecture per days of carpentry. ie if the worker does on more day of carpentry he has to give up 1.25 days if lecture.

1.3 factor that would lead to an outward shift of the diagram drawn ​​​​​​​:

The outward shift in PPF can be caused by increased productivity in terms of increased wage in either or both job.

If he gets more income out of same time devoted to one job he could have more aggregate income and PPF will shiftout.

1.4 factor that could lead to an inward shift of the curve drawn:

The inward shift can be caused by fall in the daily income or productivity

1.5 welfare effects of government intervention in the form of legislation that sets the minimum wage rate for a carpenter at R1000 per day:

Increase in daily income in carpentry from 800 to 1000 will decrease the opportunity cost of carpentry from 1.25 to 1.Then the worker can earn more with same time devoted to lecture and carpentry.

This will cause a outward shift in the PPF.