In the modern sector, where the production decisions are guided by profit motive

Question

In the modern sector, where the production decisions are guided by profit motive, the real wage rate measured in the quantity of food is 2 kilograms per worker. Then, how many workers are employed in the modern sector? Recognize the area in the graph, which represents profit in the modern sector that can be invested to raise labor productivity. If this profit is invested to increase production in the modern sector, more workers will be needed. But is that not going to raise the real wage in the modern sector? If you think that a real wage of 2 kg of food will not increase, explain why you think so.

Explanation / Answer

Ans

Where demand curve intersect real wage line, that much workers will be employed

L= 20

Area above wage line and below demand curve is the profit that can be reinvested to raise the labor productivity

If this profit is invested to increase production then more workers will be demanded, than high wages in nominal terms will be demanded and given, this will raise the cost of production and therefore producers will raise prices and general price level will increase so real wages, which is equal to nominal wages/ price level , will remain the same and real wages will not change because both nominal wages and price will increase and there will be no effect on real wages.

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