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## the famous retailer profits paradox revisited

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### the famous retailer profits paradox revisited

by jzw » Wed Mar 21, 2012 8:30 am
Everybody knows the following one:

A discount retailer of basic household necessities employs thousands of people and pays most of them at the minimum wage rate. Yet following a federally mandated increase of the minimum wage rate that increased the retailer's operating costs considerably, the retailer's profits increased markedly.

Which of the following, if true, most helps to resolve the apparent paradox?
(A) Over half of the retailer's operating costs consist of payroll expenditures; yet only a small percentage of those expenditures go to pay management salaries.
(B) The retailer's customer base is made up primarily of people who earn, or who depend on the earnings of others who earn, the minimum wage.
(C) The retailer's operating costs, other than wages, increased substantially after the increase in the minimum wage rate went into effect.
(D) When the increase in the minimum wage rate went into effect, the retailer also raised the age rate for employees who had been earning just above minimum wage.
(E) The majority of the retailer's employees work as cashiers, and most cashiers are paid the minimum wage.

And, everyone knows the answer is B.

BUT - Let's think for a moment, and consider D. By increasing the age rate for employees who had been earning just above minimum wage, isn't he DECREASING the number of employees who actually earn above minimum wage? In other words - if the policy @ the store was - "ONLY anyone 20 and over can earn above minimum wage", and now minimum wage has been increased anyway, the owner bumps up the age to say, 30, and those employees who had been earning above minimum wage (those over than 20) now can earn minimum wage, but not as much as they had been earning with whatever their prior wage was.

I know everyone's gunna say "that's a lot of assumptions...." Yeah, but isn't that how we resolve a paradox? We're looking for a change in the owner's policy that he made in order to counteract the increase. If he had been paying $10 an hour to ppl over 20, and minimum wage went from$7/hour to $8/hour, he then goes ahead and increases the age limit to 30 and now everyone 30 and under who had been earning$10 are now at the minimum wage rate (which is lower) and he could actually have GAINED by doing this.

All B really says is that his customers are ppl that earn minimum wage, and it's easy to think, ah, more money earned, more money to spend, more money to store, profits up. BUT did anyone stop to consider that while his sales MAY go up bec of the wage increase, SO DO HIS COSTS. Who says that the purchasing volume exceeded HIS OWN ADDITIONAL COST DUE TO THE SAME MIN WAGE INCREASE that he has to now pay his employees? And who says that he he could even make more if there are higher volumes? Nowhere does it specify any correlation between his volume and some sort of manufacturing discount he receives. Furthermore - why do we think that just bec his normal shoppers are min wage workers, that they will need to buy more stuff from his store? Maybe they want a nice LED TV? Or an iPhone? Why are we to presume that they will say "oh thank god!!! now i can buy more palmolive soap and bounty and ajax!!! oh yeah - this is my lucky day!!!"

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by scholardream » Thu Mar 22, 2012 4:38 pm
Hi Jzw,
Plz provide your idea on my response.
To increase the retailer's profit in this situation, there are 3 ways: increase the revenue & maintain the cost , maintain the revenue & decrease the cost, the revenue increase more than the cost.
For D, your assumption ""ONLY anyone 20 and over can earn above minimum wage", and now minimum wage has been increased anyway, the owner bumps up the age to say, 30, and those employees who had been earning above minimum wage (those over than 20) now can earn minimum wage, but not as much as they had been earning with whatever their prior wage was" -> in this case, even the retailer keep the same number of employees, whatever the age they are, the cost of employee always goes up. For your assumption, I think there're no different in term of minimum salary between 20 staffs aging from 20 to 30 and 20 staffs aging above 30 as they always receive minimum salary. The retailer only pay minimum salary for those positions in their company, if anyone doesn't agree and only wanna to work with wage higher than minimum salary, plz find another place. There're many unemployment willing to take that position.
For B, "Yet following" is not a quiet long time,and this could say that the retailer have the increased profits. First by maintaining cost of goods sold, the retailer's providers can't immediately rise the price as the contract is still under effect. It's practical case. Second, living with minimum wage is not enjoyable, you'll be starving but I can assure that you have consider so much before buying a thing. Foods and household stuffs are in the most priority list. People with salary well above salary could think of better comsumption, such as LED TV or iPhone. It's normal for erudite people with good compensation package. But it's a dream for people living at minimum. So, increase the minimum salary, in short term, absolutely increase the revenue of that discount retailer of basic household necessities.

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