Suppose a project will need to hire 20 workers in a local labor market in which 200 workers are employed, 80 are unemployed, and the going wage is $30,000. A project staff member calculates the social opportunity cost of hiring the labor as $600,000 for purposes of doing a project BCA. What is wrong with this calculation? Offer and defend a better calculation. Include a sketch depicting the conditions in the labor market.
) Suppose a project will need to hire 20 workers in a local labor market in which 200 workers are employed, 80 are
Let us first understand the meaning of social opportunity cost. When any goods or services are produced, the resources used to make them are not available for other purposes. In this case, the social opportunity cost of hiring unemployed labor is not $600,000 but the amount of leisure he was having unemployed. It is the explicit cost for the firm because the firm could have used $600,000 in other resources. Of course, the opportunity cost of hiring unemployed labor is not zero because he might have been doing some work at home for free that could have cost him a certain amount. So the worker is giving up his leisure and other work that he could have done at home.
Step by step
Solved in 2 steps
