Question

A given economy consists of markets A and B. All workers are equally skilled and choose jobs based only on wages. Due to an exogenous reason (say, a government regulation), the outcome is such that in market A the value of the marginal product of labour is $17 and the wage is wA = $22, whereas in market B the value of the marginal product of labour is $15 and the wage is wB = $24. This means that A. efficiency could be improved by reallocating workers from market B to market A. B. efficiency could be improved by reallocating workers from market A to market B. C. full efficiency in this market could be achieved even without reallocating workers between the two markets. D. efficiency could be improved by increasing the wage in market B. E. efficiency cannot be improved because the labour market outcome is fully efficient.

Answer 1

Answer:C. full efficiency in this market could be achieved even without reallocating workers between the two markets.

Explanation:

The marginal product of labour is the additional value that will be gained from production from employment of additional labour. The Entrepreneur will be willing to employ additional labour if the wages is lower than the marginal productivity and efficiency will only be achieved at that point.

Moving the labour from to market will not achieved efficiency in either market, for the wage rate is higher than the marginal product of labour in both market.

Increasing wage rate will reduce the efficiency and there is need to increase efficiency by making the marginal product of labour to be higher than labour rate.