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Lecture 25

# Lecture 25 - Econ 201 Lecture 25 Wage and Salary...

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Econ 201 Lecture 25 Wage and Salary Determination Example 25.1 . Brady's Brick Company is one of hundreds of small firms that hire labor to mould bricks out of clay, which are then sold in the world market for ten cents apiece. Brady's only costs are its labor costs, and it has two brickmakers, John and Sue. Sue makes 40 bricks per hour and John makes 30. If the labor market for brickmakers is competitive, how much will Sue and John be paid per hour? The value of the extra bricks that Sue makes is \$4.00 per hour and this will be her wage under perfect competition. Any firm that paid her less would risk having her bid away by a competitor. Any firm that paid her more would lose money by employing her. Likewise, the competitive equilibrium wage for John is \$3.00 per hour. In competitive labor markets, workers are paid the value of what they add to the employer's revenue. In many production processes, when a firm's capital and other productive inputs are held fixed, the productivity of each worker declines as the firm hires more workers. This pattern is often called The Law of Diminishing Returns. It explains why the world's population cannot be fed by the amount of grain grown on a single acre of land, now matter how many farm workers we employ. Example 25.2. The Acme Widget Company sells widgets for \$1.00 each, and hires workers in a competitive labor market at a wage of \$2.50/hr. The number of widgets varies with the number of workers as follows: # of workers widgets/hr extra widgets/hr 0 0 1 10 10 2 16 6 3 20 4 4 22 2 5 23 1 How many workers should Acme hire? Hiring the third worker adds 4 widgets per hour, which boosts Acme's revenue by \$4.00/hr. Thus the benefit of hiring the third worker (\$4.00/hr) exceeds the cost (\$2.50/hr). Hiring the fourth worker adds only \$2.00/hr, which is less that it costs. So Acme should hire 3 workers. Note that the number of workers hired depends not only on the amount of goods or services a worker produces, but also on the extent to which buyers value those goods or services.

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