The following table shows the relationship between units of labour and total pro
ID: 1194764 • Letter: T
Question
The following table shows the relationship between units of labour and total product for a firm that hires labour in a competitive labour market, and sells its product in a competitive output market at a price of $2 per unit. Complete the labour demand table above. Remember to put marginal product and marginal revenue product in between units. How many workers will the firm hire if the market wage rate is S27.95? How many workers w ill the firm hire if the market w age rate is $19.95? Explain. Show on a graph the labour demand curve of this firm. Now assume that the firm is selling in an imperfectly competitive market and that, although it can sell 17 units at $2.20 per unit, it must lower the product price by $0.05 to sell the marginal product of each successive labour unit. Redetermine the firm's demand curve for labour. Compare this demand curve with that derived in pad (b). Which curve is more elastic? Explain.Explanation / Answer
(a)
Units of Labour
Total Product
Marginal Product
Product Price
Total Revenue
Marginal Revenue
Marginal Revenue Product
VMPL (MP × Product Price)
0
0
-
2
0
0
0
0
1
17
17
2
34
2
34
34
2
31
14
2
62
2
28
28
3
43
12
2
86
2
24
24
4
53
10
2
106
2
20
20
5
60
7
2
120
2
14
14
6
65
5
2
130
2
10
10
Marginal Product MP is calculated as:
TP/L
Total revenue is Price × Quantity
As the firm sells in a perfectly competitive output market, it charges the same price for each unit of output. Total output is equal to Total Product. So Total Revenue = TP × Price.
Since we are considering a perfectly competitive firm, its MR is equal to price at all levels of output. Therefore, MRP is equal to VMP
Marginal Revenue product = MP × MR
(b) A competitive frim will hire labour up to the point where the marginal revenue product of labour is equal to its marginal cost i.e. its wage rate (w) or VMPL is equal to the wage rate.
Here, when the market wage rate is $27.95, the firm will hire 2 units of labour. When the market wage rate is $19.95, 4 units of labour are hired.
(d) In an imperfect product market, since MR is less than AR (P), the MRP will be less than the value of marginal product (VMP). Its MRP curve serves as its demand curve. Its new demand curve will be steeper as more can be sold by lowering prices of all the units.
Units of Labour
Total Product
Marginal Product
Product Price
Total Revenue
Marginal Revenue
Marginal Revenue Product
VMPL (MP × Product Price)
0
0
-
2
0
0
0
0
1
17
17
2
34
2
34
34
2
31
14
2
62
2
28
28
3
43
12
2
86
2
24
24
4
53
10
2
106
2
20
20
5
60
7
2
120
2
14
14
6
65
5
2
130
2
10
10
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