Question

5. Suppose a labor market has the marginal revenue product of labor function MRP_L = 20 – L for each group of workers. Group A is paid $5.75 per hour and 12 workers from that group are hired. Group B is paid $8 per hour and 12 workers from that group are hired.

a) Does there appear to be discrimination against either group of workers? If so, which group?

b) If you are a profit-maximizing employer and you regard workers from groups A and B as perfectly substitutable, which group should you hire and why?

Answer 1

5. Since both groups of workers have same MRP_L it means that both groups are equally efficient.

a). Given that both groups are equally efficient and the firm hires equal number of workers from both groups then giving one group of workers less wage than the other clearly implies discrimination. In the given question groupA gets less wage than group B. Hence group B is discriminated.

b) It is Given that workers from both groups are perfectly substitutable. Inorder to maximize profit firm must minimize it's cost and hence , the firm should hire workers from cheaper group. In group A workers are paid $5.75 per hour whereas in group B workers are paid $8 per hour . Clearly group A is the cheaper group and hence firm should hire workers from group A only to maximize profit.