Pat works for a landscape contractor,generating gross revenues of $50 per hour.Non-labor variable costs total $10 per hour.Pat loves to garden,and would be willing to work for $15 per hour.Assume that the labor market is perfectly competitive.
Pat's reservation price for an hour of work is _______ per hour.

Question

Quizplus · Accepted Answer

Pat's reservation price is the minimum price at which he is willing to sell his labor. In this case, Pat loves gardening and is willing to work for $15 per hour. Therefore, his reservation price is $15 per hour.

The best choice for Pat would be to work for his employer, generating gross revenues of $50 per hour. Although Pat's labor generates $50 per hour for his employer, the employer only has to pay Pat his reservation price of $15 per hour. This means that the employer earns a profit of $50 - $15 - $10 = $25 per hour for every hour that Pat works. Pat, on the other hand, earns $15 per hour, which is higher than his reservation price of $15 per hour. Therefore, this is the best choice for Pat.

Pat Works for a Landscape Contractor,generating Gross Revenues of $50