Question

A new public works project requires 300,000 hours of labor to complete.

a. Suppose that the labor market is perfectly competitive and the market wage is $20. What is the opportunity cost of the labor employed for the project.

b. Suppose that there is currently unemployment among workers and that there are some workers who would willingly work for $12 per hour. What is the opportunity cost of the labor employed? Does this vary depending on the fraction of would-be unemployed workers hired for the project?

c. if your answers to (a) and (b) differ, explain why?

Answer 1

a)

Here,

Market Wage is $20

That is a labor can get job in the market at $20

So opportunity cost will be $20

b)

Here,

Labor Available at $12

So the labor who are currently employed cannot get better wages than $12 in the open market. hence here opportunity cost is $12

c)

In case of a and b answers are different because i the first case the market wage is $20 but in the second case since the labor are available at below market wages at $12 hence, the opportunity cost differs in both the cases