Question

Companies come for campus placement where through interview they try to estimate the candidate’s future marginal revenue product and after the process decide the salary. After one year’s performance (or any decided tenure), the candidate is either promoted or sacked. What economic calculations are taken in account to arrive at the decision? Explain in detail with graphs

Answer 1

The economic calculations the companies perform is the benefit cost analysis. They base their studies on whether the employee' s marginal revenue is equal to his marginal cost.

The marginal cost of the person would be the salary he gets for production of an extra unit of good, which may be the one additional project he is undertaking or the additional day he is spending marketing the good.

The marginal revenue would be the benefits they get from his additional contribution to the project, or the ideas he provides in the marketing Sector to increase the sales (which actually increase the sale) or the marginal increase in production due to his efficiency.

If the firm believes that the employee is able to provide the contribution to the revenues or profits of the firm for which is he is paid, and the costs paid in form of salaries and other benefits like healthcare, housing etc is equal to the revenues the firm is able to generate from employing the person, then it is viable to let him work or promote him,otherwise it is viable to sack him.

Prices Mn MB Quantity

In the graph above the equilibrium would be when MB= MC ie marginal benefits from employee is same as the marginal costs of employee.

(You can comment for doubts)