Question

Requirement: Answers to each of the following problems will be evaluated based on accuracy, completeness and clarity. Unsupported answers will receive no credit. Any assumptions you make in answering the questions should be clearly stated. Point allocation is given beside each question.

Condition: Suppose Oregon proposes indexing the minimum wage to inflation. In the space below, summarize what it would mean to index the minimum wage to inflation, and then describe the substitution and scale effects you anticipate with this policy? (In your response, assume that the minimum wage is an effective price floor and that both factor and product markets are perfectly competitive.)

Question: Would it ever be rational for a firm to retain an employee whose current marginal revenue product is less than her current wage? Explain.

Answer 1

The marginal revenue productivity theory of wages is a theory of neo-classical economics starting that wages are paid at a level equal to the marginal product of labor . MRP which is the increment to revenues caused by the increment to output produced by the last laborer employed.The marginal revenue product of a worker is equal to the product of the marginal product of labor(MP)and the marginal revenue(MR).MRP=MP*MR.The theory states that workers will be hired up to the point when the marginal revenue product is equal to the wage rate.So it is not rational to a firm to retain  an employee whose current marginal revenue product is less than her current wage.