| Question |
Bad Breath, Inc., sells its output at $ 1 per unit into competitive markets. Bad Breath’s factory is the only employer of labor in Gilroy, California (garlic capital of the world). It faces a supply from competitive workers of QL = w, where QL is the number of workers hired per year and w is the annual wage. Each additional worker hired adds 1 less unit of output than was added by the previous worker. The 30,000th worker adds nothing to total output. Bad Breath must pay all workers the same wage and, because it has to raise wages to get more labor, each additional worker costs the company 2QL dollars per year. To maximize profit, how much labor should Bad Breath hire and what wage should it pay? Does efficiency prevail in the Gilroy labor market? If not, what is the size of the deadweight loss? |
