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The Effect Of Wage Rate And Profit

667 words - 3 pages

University of cape coast
School of business

MANAGERIAL ECONOMICS

Assignment

SB/MHR/13/0005

With a wage rate without overtime, an increase may not increase the working population of the firm as income effect of the increase will mean demand for leisure being high holding expenditure on other costs constant. This will reduce the working population and also reduced output and profit. On the other-hand, with overtime, workers who work only 8 hours will remain in the same wage level but earn more when additional time is spent on work. This will mean extra man hours into production thus increasing output and profit.

Income/Wage

BC1

From the diagram above, BC1 represents the original budget constraint and BC2 be the budget constraint under with overtime rate which the manager is initiating. The aim here is to increase the working population of firm in terms of man hours needed to produce more pineapple ...view middle of the document...

All things being equal the increase in output will result in increased revenue and profit.

Also from the diagram below, if the firm increases wages to 30 cedis per hour, a new constraint is established at BC3 due to increase in the income level. The firm will pay more for labour hours (24hours = 720 cedis) and every 8 hours spent by workers will be more expensive. On the other hand, the increase is supposed to motivate workers to work efficiently and spend more time at work but does not provide incentive to work overtime. The effect on profit may be ambiguous since this effect may be driven by the increase in working population (and output) due to increase in income or substituted man hours to be spent on leisure for more working hours in other to earn more. The points a -> c reflects the income effect and c->d reflects the substitution effect.

Income/Wage

BC1

-----------------------
800

750

700

650

600

550

500

450

400

350

300

250

200

0 2 4 6 8 10 12 16 18 20 22 24
Leisure (Hours of Work)

BC2

800

750

700

650

600

550

500

450

400

350

300

250

200

IC1

IC2

BC2

a

b

BC3

BC1

b

b

c

a

IC3

IC2

IC1

0 2 4 6 8 10 12 16 18 20 22 24
Leisure (Hours of Work)

d

Que: A foreign firm produces pineapples for export in a town with very high ageing population. Over the decade the size of its working population has shrunk. During the early 2005, the labour shortage hampered the firm’s ability to hire enough workers to meet its growing demand and production target, despite paying a rate of 20 cedis per hour four times above the national average wage rate for workers.
The firm hired a new manager who initiated an overtime wage plan under which workers earn 20 cedis per hour for the first 8 hours and 25 cedis per hour for each hour worked in a day in excess of 8 hours.
Required: with the aid of appropriate illustration(s) show that this plan is profitable to the firm. Will the firm had been better off if they had increased wage rate from 20 to 30 cedis per hour?

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