Question

In: Economics

Suppose that low-skilled workers employed in clearing woodland can each clear one acre per month if...

Suppose that low-skilled workers employed in clearing woodland can each clear one acre per month if each is equipped with a shovel, a machete, and a chainsaw. Clearing one acre brings in $1,200 in revenue. Each worker’s equipment costs the worker’s employer $215 per month to rent and each worker toils 40 hours per week for 4 weeks each month.

Instructions: In part a, enter your answer as a whole number. In parts b-e, round your answers to 2 decimal places.

a. What is the marginal revenue product of hiring one low-skilled worker to clear woodland for one month?

b. How much revenue per hour does each worker bring in?

c. If the minimum wage were $7.40, would the revenue per hour in part b exceed the minimum wage?

If so, by how much per hour?

d. Consider the employer’s total costs. These include the equipment costs as well as a normal profit of $50 per acre. If the firm pays workers the minimum wage of $7.40 per hour, what will the firm’s economic profit or loss be per acre?

e. At what value would the minimum wage have to be set so that the firm would make zero economic profit from employing an additional low-skilled worker to clear woodland?

Solutions

Expert Solution

a. What is the marginal revenue product of hiring one low-skilled worker to clear woodland for one month?

MRPL=Revenue per acre=$1200

b. How much revenue per hour does each worker bring in?

Number of working hours per month per worker=H=4*40=160

Revenue per hour=MRPL/ H=1200/160=$7.50 per hour per worker

c. If the minimum wage were $7.40, would the revenue per hour in part b exceed the minimum wage?

If so, by how much per hour?

Yes, Revenue per hour per worker is higher than minimum wage.

Difference=7.50-7.40=$0.10 per hour per worker

d. Consider the employer’s total costs. These include the equipment costs as well as a normal profit of $50 per acre. If the firm pays workers the minimum wage of $7.40 per hour, what will the firm’s economic profit or loss be per acre?

Total Revenue=$1200 per acre per month

Labor Cost=LC=7.40*4*40=$1184 per acre per month

Fixed Cost=FC=$215 per acre per month

Normal Profit=NP=$50 per acre per month

Total Cost =TC=FC+LC+NP=215+1184+50=$1449 per acre per month

Economic profit=TR-TC=1200-1449=-$249.00 per acre per month (Its a loss)

e. At what value would the minimum wage have to be set so that the firm would make zero economic profit from employing an additional low-skilled worker to clear woodland?

Let minimum wage be w

Labor Cost=LC=w*4*40=160w per acre per month

Total Cost =TC=FC+LC+NP=215+160w+50=265+160w per acre per month

Economic profit=TR-TC=1200-265-160w

Set Economic profit=0

1200-265-160w=0

935-160w=0

w=935/160=$5.84

Rahul Sunny answered 1 year ago
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