Q4. Consider a labor market. There are equal numbers of two kinds of workers, al
ID: 1117705 • Letter: Q
Question
Q4. Consider a labor market. There are equal numbers of two kinds of workers, alphas and betas. When employed, alphas produce 8 units of output while betas produce 18 units. When unemployed, alphas earn $0 while beta earn $11. Production takes place in perfectly competitive firms who compete to hire workers (based on the expected marginal product of the workers). A worker who produces 1 unit of output would be worth wage $1 a) Assume employers cannot determine the productivity of individual workers but do know the average productivity of the work force. What will be the wage rate and average income per worker? b) Now suppose that at a cost of $2, betas can, if they desire, be certified as betas before entering the labor market. The process is error free, so alphas cannot be falsely certified and no beta ever fails the process. If this is common knowledge, and employers are permitted to offer different wages for certified and non-certified workers, what will be the wage rates and the average net income per worker? c) How would the results in Part (b) change if the cost of certification were $6 rather than $21? Be sure to find all equilibria.Explanation / Answer
Answer:
Under traditional costing, Overhead is assigned on the basis of Direct labor hours or direct labor cost. Here, the overhead is assigned on the basis of direct labor hours.
Calculating Direct labor hours for Alpha and Beta:
Direct labor hours = No. of units x Direct labor hour per unit
Alpha: 27800 units x 2 hours per unit = 55600 hours
Beta: 2800 units x 3 hours per unit = 8400 hours
Calculating estimated total direct labor hours:
Estimated Total direct labor hours = Direct labor hours for Alpha + Direct labor hours for Beta
= 55600 hours + 8400 hours
= 64000 hours
Calculating Overhead rate per unit of Beta:
Overhead rate per unit of Beta = (Estimated annual manufacturing overhead cost / Estimated Total direct labor hours) x Direct labour hours per unit of Beta
= ($281256 / 64000 hours ) x 3 hours per unit
= $4.394625 per hour x 3 hours per unit
= $13.183875 per unit
= $13.18 per unit (rounded off to two decimal places)
Therefore, each unit of Beta would be assigned overhead of $13.18
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