2007 Microeconomics FRQ #2
(A) Using the specific information above, draw a correctly labeled graph of HZRad's current supply curve for unskilled labor.
Most of these questions are almost all identical. Recognise that the phrase, "can hire all the unskilled labor it needs at a wage of $90 per day per worker." is telling you that the there is a perfectly competitive market for labor. Lets graph it.
(B) What is HZRad's profit maximising output level? Explain.
Profit Max is where MRP=MRC, sounds familiar, yes!
A Table is helpful, learn (memorise) how to set this table up.
You are given the first two columns, Labor, Total Product, Price of the Good and the Wage Rate.
The MRP is the amount brought in by adding that worker into the production. The 1st worker brings in $400 and we pay her $90. Yes, we want to hire this person. The 2nd worker brings in $500 and we pay him $90. Yes, we want to hire him. We go down until the MRP=MRC and this is where profit is maximised. Notice, that at the 5th person we hire they are bringing in $100 and costing us $90.
MRP does not equal MRC but it is as close as we can come without loosing money. The 6th person hired would only bring in $80 and would cost us $90, a loss of $10. So don't hire the 6th person.
You can't hire a piece of someone so marginally we can either hire 5 or 6 and the 5th makes us some profit while the 6th costs us money.
Answer - Output level = 75 units of the good. The 5th worker
(C) Suppose the company uses a new technology to increase the productivity of the workers.
(i) How will the new technology affect the quantity of the workers hired? Explain.
(ii) How will the new technology affect the wages paid to the workers hired?
So, if HZRad's technology improves each and every worker will be able to be more productive. Lets pretend that every worker will be able to double their productivity.
Notice that with our workers productivity being doubles it is now profitable to hire the 6th worker as she brings in $160 and we only pay her $90. We wouldn't hire the 7th worker as he only brings in $40 but would cost us $90.
Answer (i) - If technology increases the productivity of the workers then more workers can potentially be hired as they become marginally profitable. MRP curve will shift rightward. QL hired will increase.
Laymen's terms (if you make money off of them - hire them)
Answer (ii) - I would not pay them higher wages. If I buy new machines that make my workers more productive why on the green Earth would I pay them more money. Remember my goal is to make a profit. I pay my workers enough to keep them working for me. I invest in new technology and expect to make more profit. Competition is what raises wages not benevolence. This assumes that I'm the only one with the new technology.
But, If the problem says that the the MARKET has the new technology then everyone will become more productive and I will have to pay my people more money as wages will rise. I will have to attract more people into the industry to work for me.
Check out my cheat sheet, Labor Cheat Sheet
Freak-onomics podcast - How to be more productive - Here