solution

In February 2003, Circuit City Stores, Inc. replaced skilled sales representatives who earn up to $54,000 per year with relatively unskilled workers who earn $14 to $18 per hour (Carlos Tejada and Gary McWilliams, “New Recipe for Cost Savings: Replace Highly Paid Workers,” Wall Street Journal, June 11, 2003). Suppose that sales representatives sell one particular Sony high-definition TV model. Let q represent the number of TVs sold per hour, s the number of skilled sales reps per hour, and u the number of unskilled reps per hour. Working eight hours per day, each skilled worker sells six TVs per day, and each unskilled worker sells four. The wage rate of the skilled workers is w_s = +26 and the wage rate of the unskilled workers is w_u = +16 per hour.

a. Using a graph similar to Figure 6.3, show the isoquant for q=4 with both skilled and unskilled sales representatives. Are they substitutes?

b. Draw a representative isocost for c = $104 per hour.

c. Using an isocost-isoquant diagram, identify the cost-minimizing number of skilled and unskilled reps to sell q=4 TVs per hour.