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 each is 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 $275 per month to rent and each worker toils 40 hours per week for 4 weeks each month.

Instructions: In part a, enter your answer as a whole number. In parts b-e, round your answers to 2 decimal places.

a. What is the marginal revenue product of hiring one low-skilled worker to clear woodland for one month? $1500

b. How much revenue per hour does each worker bring in? $ ___________

c. If the minimum wage were $9.28, would the revenue per hour in part b exceed the minimum wage? Yes

     If so, by how much per hour? $________ 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 $9.28 per hour, what will the firm’s economic profit or loss be per acre?

    The firm’s lossprofit per acre will be $ ________

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

(a) Marginal revenue is extra revenue generated by hiring one more farmer, So it is $1500.

(b) Revenue per worker / Number of hours working
Revenue per hour = 1500 / (40*4) = 1500 / 160 = $9.38 per hour

(c) Minimum wage is given as 9.28, so revenue per hour exceeds minimum wage by 9.38 - 9.28 = $0.10 per hour

(d) Firm economic profit = Revenue - Equipment Cost - Profit per Acre - Labor Cost
Firm economic profit = 1500 - 275 - 50 - 9.28 * 160 = -309.8

(e) If X is the firm’s labor cost per worker for one month to clear one acre, then we need
$1500 - $275 - $50 – X = 0.
$1500 - $275 - $50 = X
So X = 1175
Since number of working hours = 160, wage = 1175 / 160 = 7.34 per hour

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