Assume that the productivity of farm labour depends on daily caloric intake, similarly to that depicted in Figure17.4. Using this kind of diagram, compare the efficiency wages that would apply to the following two types of workers:• A landless labourer• A labourer with small plot of land on which hegrows staple cropsDescribe the likely equilibrium unemployment rates and wage rates for landless labourers and small landholders. Judging partially on the basis of this example, what sorts of data and what empirical strategies might you use to see whether nutritional efficiency wages were an important element in the rural labour markets of poor, rural economies? FIGURE 17.4 Determination of the Efficiency WageOutputThe efficiency wage, W", isthe wage that maximizesprofits when worker produc-tivity depends on how muchhe or she is paid. The effi-ciency relationship linkingproductivity (output) andwages is given by g(WL).Maximizing profits can beshown to imply minimizingthe cost per unit of output,W/Q, or equivalently, maxi-mizing Q/W. Any ray throughthe origin has a slope (riseover run) equal to Q/W.Maximizing profits thenrequires choosing the wageon g(WL) that lies on thesteepest ray Q/W. Thechoice of a wage like W₁yields output Q, and a slopeof Q₁/W₁. The firm would dobetter by increasing thewage to W₂, but profits aremaximized by raising thewage to W", at the tangencybetween Q/W and g(WL).This tangency implies thatthe slopes of the two func-tions are equal; that isAQ QAW WQ*Q₂Q₁AQ_QᎪᎳ ᎳW₁ W₂W*WageQ*W*Q = g(W; L)Q₁W₁

The productivity of the worker depends upon the wage rate paid to them this will define the…

Answered: Assume that the productivity of farm…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume that the productivity of farm labour depends on daily caloric intake, similarly to that depicted in Figure17.4. Using this kind of diagram, compare the efficiency wages that would apply to the following two types of workers: • A landless labourer • A labourer with small plot of land on which he grows staple crops Describe the likely equilibrium unemployment rates and wage rates for landless labourers and small landholders. Judging partially on the basis of this example, what sorts of data and what empirical strategies might you use to see whether nutritional efficiency wages were an important element in the rural labour markets of poor, rural economies?

FIGURE 17.4 Determination of the Efficiency Wage
Output
The efficiency wage, W", is
the wage that maximizes
profits when worker produc-
tivity depends on how much
he or she is paid. The effi-
ciency relationship linking
productivity (output) and
wages is given by g(WL).
Maximizing profits can be
shown to imply minimizing
the cost per unit of output,
W/Q, or equivalently, maxi-
mizing Q/W. Any ray through
the origin has a slope (rise
over run) equal to Q/W.
Maximizing profits then
requires choosing the wage
on g(WL) that lies on the
steepest ray Q/W. The
choice of a wage like W₁
yields output Q, and a slope
of Q₁/W₁. The firm would do
better by increasing the
wage to W₂, but profits are
maximized by raising the
wage to W", at the tangency
between Q/W and g(WL).
This tangency implies that
the slopes of the two func-
tions are equal; that is
AQ Q
AW W
Q*
Q₂
Q₁
AQ_Q
ᎪᎳ Ꮃ
W₁ W₂
W*
Wage
Q*
W*
Q = g(W; L)
Q₁
W₁

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