Suppose that a car dealership wishes to see if efficiency wages will help improv

Question

Suppose that a car dealership wishes to see if efficiency wages will help improve its salespeople’s productivity. Currently, each salesperson sells an average of 2 cars per day while being paid $20 per hour for an 8-hour day.

a. What is the current labor cost per car sold?

b. Suppose that when the dealer raises the price of labor to $30 per hour the average number of cars sold by a salesperson increases to 4 per day. What is now the labor cost per car sold?

By how much is it higher or lower than it was before?

Has the efficiency of labor expenditures by the firm (cars sold per dollar of wages paid to salespeople) increased or decreased ?

c. Suppose that if the wage is raised a second time to $40 per hour the number of cars sold rises to an average of 5 per day. What is now the labor cost per car sold?

d. If the firm’s goal is to maximize the efficiency of its labor expenditures, which of the three hourly salary rates should it use: $20 per hour, $30 per hour, or $40 per hour?

e. By contrast, which salary maximizes the productivity of the car dealer’s workers (cars sold per worker per day)?

Explanation / Answer

Given that, each salesperson sells an average of 2 cars per day and the wage is $20 per hour for an 8-hour day.

a. Current labor cost of selling a car=20*8/2=$80.

b. When wage is $30, the salesman sells an average of 4 cars per day

Current labor cost of selling a car=30*8/4=$60

It is $20 less than before. It means that effeciency of labor has increased.

c.  Current labor cost of selling a car=40*8/5=$64

d. The firms should give $30 per hour. That is when current cost of selling a car is the minimum.

e. Salary of $40 maximises the productivity of the workers because the number of cars is sold is maximum.

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