The table below shows a competitive firm\'s short-run production function. Labor

Question

The table below shows a competitive firm's short-run production function. Labor is the firm's only variable input, and market price for the firm's product is $2 per unit.

1. How much does the fifth unit of labor add to the firm's total revenue?

A. $160.
B. $80.
C. $60.
D. $40.
E. $10.

2. If the wage rate is $200, how many units of labor will the firm employ?
A. 3.
B. 4.
C. 5.
D. 6.
E. 0, the firm shuts down.

3. If the wage rate is $200, the firm should
A. Shut down because average revenue product is $200, which is less than marginal revenue product.
B. Shut down because average revenue product is $228, which is greater than the wage rate.
C. Produce because average revenue product is $200, which is less than marginal revenue product.
D. Produce because average revenue product is $245, which is greater than the wage rate.

4. If market price for the firm's product increases to $5, how many units of labor will the firm employ at a wage rate of $200?
A. 0, the firm shuts down.
B. 4.
C. 5.
D. 6.
E. 7.

Please show work steps

Units of Labor Units of Output 3 370 4 490 5 570 6 600 7 620

Explanation / Answer

1. A

5th labour contribution P*dQ = 2*(570-490) = 160

2. B, since after this the marginal return from additional unit of labour is less than marginal cost.

3.D. Produce because average revenue product is $245, which is greater than the wage rate.

4. C, since after this the marginal return from additional unit of labour is less than marginal cost.

MPL = marginal product of labour = df/dl

MR = marginal revenue from additional labour = dR/dl

MC = marginal cost of hiring additional labour

ARP = average revenue product = total revenue/ total labour

Units of Labor Units of Output MPL MR MC ARP AT W=5 MR 3 370 200 246.6667 4 490 120 240 200 245 600 5 570 80 160 200 228 400 6 600 30 60 200 200 150 7 620 20 40 200 177.1429 100

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