Question

A new public works project requires 20,000 hours of labor to complete. a. Suppose the labor market is perfectly competitive and the market wage is $15.What is the opportunity cost of the labor employed? b. Suppose that there is currently unemployment among workers, and that there are some workers who would willingly work for $10 per hour. What is the opportunity cost of the labor employed? Does this vary depending on the fraction of would be unemployed workers hired for the project? c. If your answers to a and b differ, explain why.

Answer 1

Answer:

a. $300,000

b. $200,000

Explanation:

a. The opportunity cost for labor is calculated by multiplying the hours of labor needed to complete the project with the market wage rate.

20,000 hours * $15 per hour = $300,000

b. There are some labors that are unemployed and has agreed to work for $10 per hour. The opportunity cost will now be lower than the previously calculated

20,000 hours * $10 per hour = $200,000

c. The opportunity cost depends on the wage rate of the labor. When the labors are employed at market rate, the opportunity cost is high and when there is unemployment the labors are willing to work for lower wage rate. The opportunity cost is decreased.