Question

Acme, Inc., supplies rocket ships to the retail market and hires workers to assemble the components. A rocket ship sells for $35,000, and Acme can buy the components for each rocket ship for $25,000. Wiley and Sam are two workers for Acme. Sam can assemble 1/5 of a rocket ship per month and Wiley can assemble 1/10. If the labor market is perfectly competitive and rocket components are Acme’s only other cost, how much will Sam and Wiley be paid?

Answer 1

Answer:

Sam payment=$1,000

Acme payment=$500

Explanation:

In a perfectly competitive labor market, the cost of labor is determined by the market as opposed to the companies. This means that each laborer will be paid according to his/her productivity.

Step 1: Calculate profits per unit

Profit=sales revenue-cost of goods

where;

sales revenue=$35,000

cost of goods sold=$25,000

replacing;

Profit=(35,000-25,000)=$10,000

Step 2: Determine share of profit for Sam and Wiley

Sam payment=level of productivity per ship×profit

where;

level of productivity per ship=1/5

profit=$5,000

replacing;

Sam payment=(1/5)×5,000=$1,000

Acme payment=level of productivity per ship×profit

where;

level of productivity per ship=1/10

profit=$5,000

replacing;

Acme payment=(1/10)×5,000=$500