The market wage rates for left-and right-handed workers are $10 and $15 per work

Question

The market wage rates for left-and right-handed workers are $10 and $15 per worker, respectively. The value of the marginal product of labor is 20 – 0.5L, where L is the total number of workers (it doesn’t matter if they’re left or right-handed).

a) What are the profit-maximizing levels of employment of left- and right-handed workers (how many of each would a nondiscriminatory employer hire)? If an employer has a discrimination coefficient of 0.7 against left-handed people, how many left- and right-handed workers does the employer hire? (4 points)

b) If the price of output is 1, output is given by 20L – 0.25L2, and the only costs to the firm are its labor costs, what are the profits to a non-discriminatory employer? What are the profits of the employer who has a discrimination coefficient of 0.7? (4 points)

Explanation / Answer

a) A non discriminatinf employer(NDE) will employ cheap labor and as Left handed labor is cheaper so

Profit maximizing quantity of labor is when wage = MPL so 10 = 20-0.5L so L=20 for left handed and 0 for right handed.

Now if discrimination coefficient of left handed is 0.7 then their wage will feel like 10*(1+.7) =17 to a discriminatory employer(DE). As 15<17 so discriminatory employer will hire all right handed employer

15=20-0.5L so L=10 right handed workers and no left handed worker

b) The cost for NDE = 20*10 = 200 Total product = 20*20-0.25*20*20 = 300 Revenue = price *quantity = 1*300 = 300

So Profit = Revenue - cost = 300 - 200 = 100

The cost for DE = 10*15 = 150 Total product = 20*10-0.25*10*10 = 175 Revenue = price *quantity = 1*175 = 175

So Profit = Revenue - cost = 175 - 150 = 25

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