Assume that an employer believes that the “efficiency” (e) it can get from a particular worker, as a function of the hourly wage (w), is given by function e = –0.125w + 0.15w2 – 0.005w3, at least up to a wage of 30.
1. Create a table of w, e, e/w, and w/e for wages equal to 5, 10, 14, 15, 16, 20, and 25.
2. Which wage gives the highest ratio of efficiency per unit of labor cost?
3. Once the firm has hit on an optimal w, whatever it is, would cutting wages whenever demand falls off increase or decrease wages per unit of efficiency?