Chapter 26, Problem 1CQ

To determine

Differences in the wage earnings and its impact over the allocation of resources.

Explanation of Solution

Wage is the income paid to the laborers for using their skill for the process of production. The wages of the laborers are determined on the basis of their productivity, which is known as the efficiency wage condition. When the workers are similar in their skills, they would be paid equal wages. Similarly, the differences in jobs cause the differences in their wages. When the jobs are very attractive, the wage will be higher and vice versa. The mobility of the workers also plays an important role in determining the wages of the workers. When there is perfect mobility in the labor market, there will be equal wages provided to the workers. Thus, the absence of these three conditions causes differences in the wages of the workers.

When there is a difference in the wages, there will be difference in the allocative role. This is because the higher wages make people to invest in the human development, such as the investment in education and health, which makes the laborer to be more productive and skilled than those without them. The unfavorable jobs or the conditions of the place of work will be accompanied with an attractive wage to attract more workers toward the labor allocation there. Thus, the wage differences play an important role in the allocation of resources of production.

Economics Concept Introduction

Production: Production is a process that involves the transformation of raw materials into final goods and services that can satisfy the needs of the consumers in a market.