Question

Assume that a firm is considering whether to hire an additional employee. The firm has a 2- period (year) time horizon with fixed hiring costs in the first period (i.e., period 0). Given the information below, determine the post -hiring wage that the firm pays in period 1 so that it equates the present [discounted] value of marginal labor cost and marginal revenue product. Graph your results. Hiring (initial) Wage (period 0) = $15,000 Hiring costs = $8,000 MRP l initially (period 0) = $10,000 MRP l post -hiring period = $30,000 "discount rate" = 5%

Answer 1

Ans :

We have been asked to work value of Marginal labor cost and marginal revenue product for year -1. Marginal means Incremental cost.

The hiring wage cost provided is 15,000 which indicate that when you hire an additional employee, 15,000 needs to be incurred. Further it is provided that fixed hiring cost will be incurred in year -0 of $ 8,000. Hence marginal cost for labor is 8,000 + 15000/1.05.

While for margin product of year 0 is 10,000 and year 1 is 30,000 which indicate incremental value is 20,000 and it needs to be discounted -- 20000/1.05

This provides us value as under :

	Marginal Labor cost	Marginal Revenue product
Year-1	$22,285.71	$19,047.62

The graphical is as under :