Question

You are a newly hired manager of a small manufacturing plant in a rural area where highly skilled labor is in short supply, despite the fact that your plant currently pays its workers $15/hour. In order to alleviate the problem of skilled labor shortage at your plant, you are considering instituting an overtime plan, where workers earn $15/hour for the first 8-hour work-shift per day and $22.50 for each hour worked beyond the regular 8-hour work-shift. Alternatively, you are considering a $7.50 increase in hourly wage for every hour worked by employees. Either plan would eliminate your plant’s problem, as production and profit levels are up by 35% each. Applying the theory of worker’s income-leisure choice, graphically illustrate (manually (hand) drawn graph/diagram) and carefully explain which plan you would implement, include the economic benefits of your plan in your explanation.

Answer 1

For the first alternative:-

The consideration is paying $15/hour for 8hours

$15X8=$120

Assuming the workers work for 5 hours beyond the regular 8 hours for $22.50 we have;

5X22.50=$112.50

The total becomes$120+112.50=232.50

For the second alternative:-

The workers are earning $15 which is the normal wages+$7.5 hourly compensation.

Assume the workers work for 13 hours like the first case;

13X(15+7.5)= 13X22.5=292.5

The first alternative is better because it saves $62.5 compared with the second alternative