Question

2. LABOR FRICTIONS, PART 1.

   The Tasty Baking Company is famous for its Butterscotch Krimpets and Koffee Kakes. In order to expand its workforce, suppose Tasty Baking must entice labor by offering a higher wage. Specifically, consider the following information.

Units of   Offered   Value of   

Labor       Wage ($)   MPL   

5       6

6       8       50   

7       10       38

8       12       26

9       14       14

10       16       2

11       18       1

A. To maximize profits, what wage will Taste Baking pay? How much labor will be hired? Demonstrate and explain.(10points)

   B. How would the Tasty Baking Company react – if at all – if a minimum wage of $14 were imposed? Demonstrate and explain. (10 points)

Answer 1

For a profit maximising firm,in a competitive setup tasty baking company will employ labour where VMPL=W.VMPL equals price of each unit of firm's output * MPL

From the table above we can see at labour intake leve=9, Vmpl=w=14.Therefore 9 units of abour will be hired.

b.If a minimum wage of $14 is imposed then again there will be no advantage for tasty baking company to entice the workers.as every other firm will have to pay the same wage.tasty baking cannot increase its wage anymore because w will be less than VMPL.So the same wage will prevail.