Question

Consider a firm where the optimal output is 36 units per day. If the firm pays its workers a wage of $50 per day, each worker produces an output of 4 units. If it pays its workers a wage of $100 per day, each worker produces an output of 9.

1. What is the profit-maximizing strategy for producing 36 units of output?
2. Assuming the going wage rate for comparable workers is $50, can the firm be described as paying an efficiency wage?

Answer 1

In the profit maximizing strategy we should minimise the cost that's will maximize profit. so here optimal output 36 units per day. if If the firm pays its workers a wage of $50 per day, each worker produces an output of 4 units so for total 36 units produce total Cost will be 36/4*$50 = $450. If it pays its workers a wage of $100 per day, each worker produces an output of 9 units for total 36 units total cost 36/9*100= $400. so here the profit maximize strategy is to pay $100 for output of 9 units each which will minimise the total cost that is $400.

This move would be consistent with an efficiency wage strategy. Whether $50 could actually be considered the efficiency wage depends on whether further increases in the wage continue to increase profits. If they do, then $50 is not the efficiency wage