Final answer:
Companies respond to higher union wages by investing in more machinery, leading to increased labor productivity yet reduced employment. The change from labor-intensive to capital-intensive production reduces labor hours, with the benefit of avoiding issues like strikes but necessitating fewer employees.
Step-by-step explanation:
The scenario presented involves a firm adjusting its production approach in response to union wage demands, a decision which affects labor productivity and employment levels. When wages increase due to union negotiations, companies often have the incentive to invest in physical capital, such as machinery, to enhance productivity; however, these investments generally result in a reduction in labor hours and the number of employees needed. For instance, with a wage set at $16 an hour, a firm might opt for a labor-intensive production method with 50 hours of labor and one machine. If wages rise to $20 or $24 an hour, the cost of labor becomes significant enough that the firm might transition to using more machines to produce the same product despite the higher capital cost, as machines can operate without the complexities associated with human labor, such as the potential to strike.
As wages increase to $24, the financial data suggests that it's most cost-effective for the firm to select the plan using three machines and fewer labor hours, which equates to hiring fewer workers. This strategy not only saves on labor costs but also increases labor productivity as each worker now operates with more capital equipment, potentially enhancing the output per labor hour.