Differences in productivity are usually the major force behind differences in wa

Question

Differences in productivity are usually the major force behind differences in wages and unit labor costs. Suppose that a single unskilled worker at a pottery factory in Mexico can produce 1 mug per hour. By comparison, suppose that a single unskilled worker at a pottery factory in the United States can produce 19 mugs per hour because more and better machinery generates higher labor productivity. The Mexican mugs and the American mugs are identical in quality and durability and sell for the same price. The daily minimum wage in Mexico is 70 pesos per day for an 8-hour work day, and the exchange rate between Mexican pesos and U.S. dollars is 18 pesos per dollar. The federal minimum wage in the United States was $7.25 per hour. Instructions: Round your answers to 3 decimal places. a. If unskilled pottery workers are paid the local minimum wage in both countries, how much is the labor cost per mug for mugs produced in Mexico? $ per mug. For mugs produced in the United States? $ per mug. b. With regard to mug production, how much higher are labor costs per hour in the United States? $ per hour. c. With regard to mug production, how much higher are labor costs per unit in Mexico? $ per unit.

Explanation / Answer

a. Given that the minimum wage is 70 pesos for 8 hours labour, and the Mexican workers can produce 1 mug per hour.

Then 8 hours = 70 pesos

or 1 hour = 70/8 or 8.75 pesos.

Thus the unit labour cost per mug is = 8.750 pesos. (1 hour = 1 mug).

Minimum wage in U.S = $7.25 and workers produce 19 mugs per hour, then

19 mugs = 1 hour

or 1 mug = 0.052 hours, so the unit labour cost of producing mug is = 0.052*7.25 = $0.377

b. Computing the result as per the U.S, we need to convert the pesos per hour wage into dollars first, only then comparison can be made.

exchange rate = 18 pesos per dollar.

or 1 pesos = 1/18 or 0.055 dollars.

then 8.75 pesos = 0.055*8.75 = $0.481.

the minimum wage in U.S is $7.25 and in Mexico is $0.481.

% higher = (7.25-0.481)/.481*100 = 1407.3% higher the wages are in U.S as compared to Mexico.

c. labour cost per unit in U.S = 0.377

LAbour cost per unit in Mexico = 0.481

% higher = (0.481-0.377)/0.377*100 = 27.58% higher in Mexico as compared to U.S

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