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.

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. The marginal revenue is $1,200. This is the revenue each worker can generate for the firm by clearing one acre.
1200

b. Since the worker generates $1,200 per month and works a total of 160 hours (40 hours per week for 4 weeks), revenue per hour equals $7.50 (= $1,200/160).
7.5

c. If the minimum wage were $7.40, revenue per hour in part b exceeds the minimum wage by 5 cents per hour (= $7.50 - $7.40).
yes , 0.10

d. Now consider the employer's total costs. They carry the equipment costs as well as a normal profit that is $50 per acre. The total equipment cost equals $150. Thus, the economic profit per worker at the minimum wage equals $1,200 (revenue) - $215 - $50 (normal profit) - 160 × $7.40 (hours of labor multiplied by the minimum wage = $1184) = (- $249). The firm suffers a loss per acre.
loss, 249

e. To determine the minimum wage necessary for the firm to earn zero economic profit, we first calculate the revenue left over for labor after accounting for normal profit and equipment cost. The revenue left over after these components have been removed is $935 (= $1,200 - $215 - $50). This leaves $935 left to pay each unit of labor for the month (clears one acre). Since each worker works 160 hours a month, the highest the break-even wage can be is $5.84 (= $935/160). This is the most elevated the lowest pay permitted by law can be set in the industry without exit.
5.84

Rahul Sunny answered 1 year ago
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