Question

Brenda owns a construction company that employs bricklayers and other skilled tradesmen. Her firm's MRP for bricklayers is 22.25 dollars per hour for each of the first seven bricklayers, 18.50 dollars for an eighth bricklayer, and 17.75 dollars for a ninth bricklayer. Given that she is a price taker when hiring bricklayers, how many bricklayers will she hire if the market equilibrium wage for bricklayers is 18.00 dollars per hour? a. Zero. b. Seven. c. Eight. d. Nine. e. More information is required to answer this question.

Short answer

c. Eight.

Step-by-step solution

Understanding the Scenario

Brenda's company evaluates the number of bricklayers to hire based on the Marginal Revenue Product (MRP) each one contributes. She will hire workers as long as their MRP is greater than or equal to the wage she pays (market equilibrium wage). In this case, the wage is $18.00 per hour.

Analyzing MRP for Each Bricklayer

The MRP per hour for the first seven bricklayers is $22.25. For the eighth bricklayer, it is $18.50, and for the ninth, it is $17.75.

Comparison of MRP with Wage

Compare the MRP of each potential bricklayer with the wage of $18.00 to determine Brenda's hiring decision. The first seven bricklayers have an MRP of $22.25, which is greater than $18.00. The eighth has an MRP of $18.50, which is also greater than $18.00. However, the ninth has an MRP of $17.75, which is less than $18.00.

Determine Number of Bricklayers to Hire

Brenda will hire up to the eighth bricklayer because their MRP is equal to or greater than the market wage of $18.00. She will not hire the ninth because the MRP of $17.75 is less than $18.00, meaning hiring them would not be profitable.

Key concepts

Market Equilibrium Wage

The market equilibrium wage is the price at which the number of workers that employers want to hire equals the number of workers willing to work. It happens when the supply and demand for labor intersect. In a competitive market, wages adjust until they reach this balance.
In Brenda's scenario, the market equilibrium wage is $18.00 per hour. This is the wage that she will use to decide how many bricklayers to hire. The key to understanding this concept is recognizing that the equilibrium wage is not just a random figure. It is determined by the forces of supply and demand in the labor market.
Employers like Brenda hire only up to the point where the marginal revenue product (MRP) of labor equals the market wage. If a worker's contribution to revenue is higher than the wage, it makes economic sense to employ them. But once the wage exceeds the MRP, hiring more workers becomes unprofitable.

Labor Economics

Labor economics studies how labor markets function. It examines the forces and institutions affecting labor demand and supply, wage determination, and employment. Understanding labor economics helps us analyze employers’ decisions, like Brenda's, regarding hiring.

• Labor Demand: In Brenda's case, the demand for labor is based on the MRP, which is the additional revenue generated by employing one more worker. Brenda will hire workers as long as their MRP exceeds or matches the market wage.
• Labor Supply: Workers decide to offer their labor at various wage levels, influenced by their opportunity cost of time, skills, and preferences.

Labor economics blends insights from economics, sociology, and human resources to understand why employers make specific hiring choices. Brenda's decision shows how the principles of labor economics are applied in real-world scenarios.

Resource Allocation

Resource allocation in economics pertains to the optimal distribution of resources, such as labor, machines, and materials, to maximize efficiency and output. For Brenda's construction company, efficient resource allocation involves hiring the right number of bricklayers.
Brenda's goal is to allocate her budget in a way that maximizes her firm’s profit. This means hiring bricklayers whose marginal revenue product (MRP) is greater than or equal to the market equilibrium wage.
By hiring up to the eighth bricklayer, Brenda ensures that her labor resources are allocated efficiently, as each worker’s MRP justifies or exceeds the wages paid. Failing to allocate resources efficiently—such as hiring the ninth bricklayer with an MRP of $17.75, less than the wage—could lead to diminished profits and unsustainable business operations. Proper resource allocation avoids wastage of resources and ensures higher profitability for businesses like Brenda's.