Reference no: EM131287384
1. Suppose a firm's production function is given by q = 10 ∗ p (Ew + Eb) where Ew represents the number of white employee-hours and Eb represents the number of black employee-hours. It can be shown that the marginal product of labor is MPE = 5√(Ew + Eb)
Suppose the equilibrium market wage for black workers is $10 per hour, and the equilibrium market wage for white workers is $15 per hour. The price of each unit of output is $60. Black and white workers are substitutes in this production function, meaning that the quantity of output only depends on the total quantity of labor (Ew + Eb). Note, Profits = Total Revenue - Total Cost = P ∗ Q - (wb ∗ Eb + ww ∗ Ew).
(a) How many worker-hours of each type would a nondiscriminatory firm hire at the equilibrium wage rates listed above. How much profits does this nondiscriminatory firm earn, assuming wages are the only cost incurred by this firm?
(b) Suppose a firm discriminates against blacks with an employer discrimination coefficient of 0.2. How many worker-hours of each type does this firm hire? How much profit does this firm earn?
(c) Suppose a firm discriminates against blacks and has an employer discrimination coefficient equal to 0.6. How many worker-hours of each type does this firm hire? How much profit does it earn?
(d) Suppose a firm is nepotic and favors blacks so it has an employer nepotism coefficient of 0.4. (You can equivalently think of this as a discrimination coefficient equal to -0.4). How many worker-hours of each type does this firm hire? How much profit does it earn?
(e) Based on your answers above, briefly discuss the long-run implications of discrimination against or preferential treatment toward a specific racial group in a competitive labor market?
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