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 $1100 in revenue. Each worker’s equipment costs the worker’s employer $165 per month to rent and each worker toils 40 hours per week for 4 weeks each month.

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

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

c. If the minimum wage were $6.83, would the revenue per hour in part b exceed the minimum wage? (Click to select)YesNo.

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 $6.83 per hour, what will the firm’s economic profit or loss be per acre?

The firm’s (Click to select)profitloss 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. Each low skilled labour clear one acre per month and clearing one acre brings in $1,100 in revenue so marginal revenue product of hiring one low skilled labour to clear woodland for one month is $1,100.

B. Revenue per hour each workers brings in:

Since the worker generates $1,100 per month and works a total of 160 hours (40 hours per week for 4 weeks),

Revenue per hour equals $6.875 (= $1100/160).

C. If the minimum wage were $6.83, revenue per hour in part b exceeds the minimum wage - yes, revenue per hour in part b exceed the minimum wage by $ 0.045 per hour (=$6.875 - $6.83).

D. Now consider the employer’s total costs.

These include the equipment costs as well as a normal profit of $50 per acre.

The total explicit cost for the firm per acre equals $165. Thus, the economic profit per worker at the minimum wage equals $1,100 (revenue) - $165 (explicit cost) - $50 (normal profit) - 160x$6.83 (hour of labor multiplied by the minimum wage = $1,092.8) = -$207.8.

The firm suffers a loss per acre.

E. To determine the minimum wage necessary for the firm to break-even (earn zero economic profit, we first calculate the revenue left over for labor after accounting for normal profit and explicit cost. The revenue left over after these components have been removed is $885 (=$1,100 - $165 - $50).

This leaves $885 left to pay each unit of labor for the month (clears one acre). Since each worker works 160 hours a month,

The minimum wage to be set that would make zero economic profit from employing additional low skilled worker to clear woodland will be $ 885/160 = $5.53

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