Assume that the firm only uses labor as a resource in production and is hiring w
ID: 1095688 • Letter: A
Question
Assume that the firm only uses labor as a resource in production and is hiring workers in a purely competitive labor market. In other words, the firm can hire as many workers as it wishes without affecting the equilibrium wage rate.
Units of Labor (L)
Total Product (Q)
Product Price (P)
Total Revenue (TR)
Marginal Revenue Product (MRP)
0
0
$2.20
$0
---
1
15
$2.00
$30
$30
2
28
$1.80
3
39
$1.60
4
48
$1.40
5
55
$1.20
6
60
$1.10
a. Is the firm selling its product in a purely competitive market or an imperfectly competitive market?
b. Completely fill out both the TR and MRP columns with the correct values.
c. Suppose the wage rate is $11.00 per worker. How many workers should be employed in order to maximize profits?
d. If the firm hires the optimum number of workers, what is its total profit?
Units of Labor (L)
Total Product (Q)
Product Price (P)
Total Revenue (TR)
Marginal Revenue Product (MRP)
0
0
$2.20
$0
---
1
15
$2.00
$30
$30
2
28
$1.80
3
39
$1.60
4
48
$1.40
5
55
$1.20
6
60
$1.10
Explanation / Answer
1. Firm is working in perfectly competative market, as for given price the firm is deciding the optimum number of workers to engage. Firm has no control over the price in the market (price taker).
2.
3. At optimum point marginal revenue product is equal to marginal factor cost. so MRP is higher till labour 4, so firm will employ 4 workers to produce 48 units of output.
4. Total profit = Total revenue (PQ)-total cost(W*L)= 67.20 - 44 = 23.20
Units of Labor (L) Total Product (Q) Product Price (P) Total Revenue (TR) Marginal Revenue Product (MRP) MPL MCL 0 0 $2.20 $0 --- --- 1 15 $2.00 $30 $30 15 $11.00 2 28 $1.80 $50.40 $23.40 13 $11.00 3 39 $1.60 $62.40 $17.60 11 $11.00 4 48 $1.40 $67.20 $12.60 9 $11.00 5 55 $1.20 $66.00 $8.40 7 $11.00 6 60 $1.10 $66.00 $5.50 5 $11.00Related Questions
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