Suppose that low-skilled workers employed in clearing woodland can each clear on

Question

Suppose that low-skilled workers employed in clearing woodland can each clear one acre per month if they are each equipped with a shovel, a machete, and a chainsaw. Clearing one acre brings in $1500 in revenue. Each worker’s equipment costs the worker’s employer $225 per month to rent and each worker toils 40 hours per week for 4 weeks each month.

d. Now 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 $9.33 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?

Explanation / Answer

d.)Economic profit or loss to the employer at a minimum wage of $9.33

Employer's total cost=cost of equipment + normal profit + wages

=$225 + $50 + ($9.33 x 160)

=$1767.8

Economic profit= Total Revenue - Total Cost

=$1500 - $1767.8

=-$267.8

Thus, the employer incurs a economic loss of $267.8

e.)Let 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 be w

In order to get economic profit, TR=TC

$1500=$225 + $50 + (160 x w)

So w=$7.656

Thus , the minimum wage should be $7.656 to make zero economic profit.

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