Suppose that a car dealership wishes to see if efficiency wages will help improv

Question

Suppose that a car dealership wishes to see if efficiency wages will help improve its salespeople’s productivity. Currently, each salesperson sells an average of one car per day while being paid $20 per hour for an eight-hour day.

a. What is the current labor cost per car sold?
$________ per vehicle

b. Suppose that when the dealer raises the price of labor to $30 per hour, the average number of cars sold by a salesperson increases to two per day.

What is now the labor cost per car sold?
$________ per vehicle

By how much is it higher or lower than it was before?
$_______ Is it: higher or lower per vehicle

Has the efficiency of labor expenditures by the firm (cars sold per dollar of wages paid to salespeople) increased or decreased?
Increased or Decreased

c. Suppose that if the wage is raised a second time to $40 per hour, the number of cars sold rises to an average of 2.5 per day. What is now the labor cost per car sold?
$_______ per vehicle

d. If the firm’s goal is to maximize the efficiency of its labor expenditures, which of the three hourly salary rates should it use: $20 per hour, $30 per hour, or $40 per hour?
$__________ per hour

e. By contrast, which salary maximizes the productivity of the car dealer’s workers (cars sold per worker per day)?
$________ per hour

Explanation / Answer

What is the current labor cost per car sold?
$160 per vehicle

On an average 1 car is sold per day.

Labor cost per day = 20 * 8hrs = $160

Thus Labor cost per car sold = $160 / 1 = $160.

b. Suppose that when the dealer raises the price of labor to $30 per hour, the average number of cars sold by a salesperson increases to two per day.

What is now the labor cost per car sold?
$120per vehicle

As the wages are increased to $30 per hour, so the Labor cost for the day = 30* 8 = 240

Average car sold in a day = 2

So Labor cost per car sold = 240 / 2= $120

By how much is it higher or lower than it was before?
$40 Is it: higher or lower per vehicle. Lower

Current Labor cost = $120

Previous Labor Cost = $160

Lower by 160- 120 = $40

Has the efficiency of labor expenditures by the firm (cars sold per dollar of wages paid to salespeople) increased or decreased?
Increased or Decreased

It has increased. As 160 is higher than 120.

c. Suppose that if the wage is raised a second time to $40 per hour, the number of cars sold rises to an average of 2.5 per day. What is now the labor cost per car sold?
$128 per vehicle

Labor wages for a day = 40 * 8= $320

Number of cars sold = 2.5

So Labor cost per car sold = 320 / 2.5 = $128

d. If the firm’s goal is to maximize the efficiency of its labor expenditures, which of the three hourly salary rates should it use: $20 per hour, $30 per hour, or $40 per hour?
$30 per hour

Comparing the three cases

$20 per hour = $160 per hour (Efficiency)

$30 per hour = $120 per hour (Efficiency)

$40 per hour = $128 per hour (Efficiency)

So the efficiency is maximum in the case of $30 per hour

e. By contrast, which salary maximizes the productivity of the car dealer’s workers (cars sold per worker per day)?
$30 per hour.

As $30 per hour is giving the maximum productivity (Output / Input)

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