Question

1. Explain why marginal physical product would diminish as more waiters are hired in a restaurant?

2. Who is hurt and who is helped by an increase in the legal minimum wage? Jobs are lost if the new minimum wage is above equilibrium wage [market price]. Under what circumstances might a higher minimum not reduce employment?

Answer 1

1)

The marginal physical product would decline as the more workers are hired by the firm. Other factors such as the land or capital do not rise side by side, thus additional contribution which is made by the workers begins to decline.

2)

The rise in the minimum wage would cause a fall in employment opportunities. But it would affect the casual or unskilled workers severely. The demand for unskilled labor declines when there is a rise in the minimum wage rate.

There will not be a fall in employment when minimum wage under the following circumstances:

• When the productivity of labor rises. An increase in the minimum wage accompanied by the rise in productivity would not cause a rise in the employment.