8. Welcome to Potter Island where you will learn the economics of pay and productivity. At one time on Potter Island everyone worked for himself. There were only eight workers on the island, and four could produce one pot a day, and four could produce two pots a day. A pot was worth ten cents. Those who can produce two pots will earn ________ per day. Those who can produce one pot will earn ______ per day.
Then one day an entrepreneur opened a factory. Old skills no longer mattered. The factory had what economists call a production function that looked like this:
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Suppose that because this first factory is so successful, a second one opens with an identical production function. What will happen to wages? (Hint: at what wage will it be unprofitable for either factory to hire away a worker from the other factory? Remember, there are only eight workers total.) _______
Economists say the reason wages are so much higher in the United States than in Mexico is that the environment is more productive for labor in the United States. The most important reason for this higher productivity is that there is more capital per worker in the U.S. How does this example illustrate this idea? What should happen to wages in Mexico as the amount of capital continues to increase? Suppose the amount of capital does not increase. What will the likely result for wages be assuming population continues to grow?
Suppose the value of a pot rises to 15 cents. What would change in the table above? What happens to wages?
Suppose that after working a year, the workers learn how to work the equipment more productively. The production functions for each of the two factories now look like this:
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Economists call the source of this increased productivity "human capital." In this case, labor became more productive by learning on the job. What is the most obvious other way can people acquire human capital?
What you earn is partly a matter of choice and partly a matter of chance (or things you have no control over). In this example we see hints of natural ability, acquired ability, the work environment, demand for the output, and maybe, if we look very hard, effort. Which of them you control and which are outside your control?
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