An internal study at Mimeo Corporation-a manufacturer of low end photocopiers-re

Question

An internal study at Mimeo Corporation-a manufacturer of low end photocopiers-revelaled that each of its workers assembles 3 photocopiers per hour and is paid $3 dollars for each assembled copier. Although the company does not have the resources needed to supervise the workers, a full time inspector verifies the quality of each unit produced before a worker is paid for his or her output. You have been asked by your supervisor to evaluate a new proposal designed to cut costs. Under the plan, workers would be paid a fixed wage of $8 per hour. Would you favor the plan? Explain.

Explanation / Answer

With a variable pay, a worker will get a payment equal to the work done. But a fixed wage guarantees an income to the worker. This increases the utility of the worker as it gives him security. And this also makes the worker complacent sometimes which reduces the level of output.

On the firm’s side, by this new plan, it can save $8 per day assuming an 8 hr per day work. And this can be saved only if there is a strict supervision on the workers. In the previous case of variable pay, the workers are self motivated. But in the later case of fixed pay the workers know that they can get a fixed pay of $8 per hour irrespective of their output.

And in the previous case a firm can employ any number of workers without any constraint. But in the later case of fixed wage it has to limit its hiring.

Thus though the proposal of fixed wage is attractive it requires strict supervision to make it cost effective, and the cost incurred in supervision should be less than $8 per day to get the benefit.

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