4. (12 points) Suppose a firm in a competitive industry faces an equilibrium pro

Question

4. (12 points) Suppose a firm in a competitive industry faces an equilibrium product price of $2 per unit of output. Table A provides information on the output produced by various amounts of labor. Use this information to complete the remaining columns of Table A, and to fill in the labor demand schedule in Table B. Table A: Production Schedule Units of Labor Total Product AP MP MRP 13 25 34 42 46 48 2 4 Table B: Labor Demand Schedule Wage Rate Quantity Demanded 24 16 (a) Complete Table A, where AP is the average product of labor, M P is the marginal product of labor, MRP is marginal revenue produce of labor. (b) Briefly explain why the marginal revenue produce of labor (MRP) will be equal to the value of the marginal product of labor (V M P) in this market. (c) Complete Table B, with the labor demand schedule for this firm at different wage rates. (d) If the equilibrium market wage rate is $8, what is the equilibrium quantity of labor hired by this firm?

Explanation / Answer

a)

AP = TP/L , MP (nth unit) = TP (n units) - TP ((n-1) units)

MRP = TP (n units) x Price - TP ((n-1) units) x Price

b) MRP = VMP (VMP = MP x Price) , this is because it is a competitive market and price is constant

c)

(Labour is hired upto the point where Wage = < MRP)

d) Q = 5

L TP AP MP MRP 0 0 1 13 13.00 13 26 2 25 12.50 12 24 3 34 11.33 9 18 4 42 10.50 8 16 5 46 9.20 4 8 6 48 8.00 2 4

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