Question

1. Explain the concept of exploitation! Provide examples to prove that lower wage rates do not necessary imply the presence of exploitation, and that high wage rates do not imply it’s absence!

2. Changes in the price of labor will result in both substitution and scale effects that determine what will happen to a firm’s employment of both capital and labor in the long run. Give an example of a production process where you think the substitution effect will most likely dominate the scale effect. In addition, give an example of a production process where you think the scale effect will most likely dominate the substitution effect. Explain your reasoning clearly.

Answer 1

Answer:Exploitation means using other person goods or services without paying them anything.or good enough compensation.

Low wages do not necessary imply the presence of exploitation.If a worker receives low wages that doesn't always mean that worker is not compensated adequately.It is a major possibility that his input remain low due to any reason.Moreover, if he is not a skilled worker or his professional or educational qualifications might also be low.,therefore he gets low wages.

A high wage does not necessary mean that the worker is not exploited.Suppose,if a senior manager in an organisation receive high pay but the manger provides input can be much higher compared to the compensation received to him.

When changes in the price of a labor take place negatively or price of a labor falls.It will result in hiring more labor because of subsitution effect.Now,capital is being subsituted in place of labor.Cheaper labor will subsitute for more capital.When price declined scale effect will also in motion,because more labor is used, so their output level is also high.So,when price decline,it also incease the output.This is also called output effect.

For example,when subsitution effect influence scale effect,labour substitute for capital,employer use less capital so that MRP shedule will fall.

Labor will be less efficient due to less capital.So,no scale effect will be exist.But if employer uses more capital due to output effect,then MRP will move towards right.Now scale effect will influence subsitution effect.