Suppose a firm hiring from a competitive labor market has the marginal revenue p
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Question
Suppose a firm hiring from a competitive labor market has the marginal revenue product schedule as given in the first two columns of the table below: Labor Marginal Wage Total Marginal Revenue Rate Labor Labor Product Cost Cóst 20 6 24 8 2810 0 24 12 4 5 1814 70 22 6 12 16 ab 7 61826wl hive 5 workers 18 12 a. If this firm can hire labor competitively at a wage of $16, how many workers will it hire? Alternatively, suppose the firm has monopsony power such that it must pay $6 to hire the first worker and must increase the wage rate by $2 to attract each successive worker, as shown in the third column of the table above. b. What is the total labor cost of hiring one worker?Of two c. What is the total labor cost of hiring three workers? What is d. What level of employment maximizes this firm's profit? workers? What is the marginal labor cost of the second worker? the marginal labor cost of the third worker? Fill in the remainder of the final two columns. $14 e. What wage rate will the firm pay to attract the profit- maximizing number of workers? Compare this outcome with that in part a.Explanation / Answer
(a) It will hire 5 workers. The marginal revenue product of the sixth worker is $12 which is less than his wage rate of $16. Therefore, hiring the sixth worker will reduce profits.
(b) The total labor cost is equal to the wage rate times the number of workers.
The total labor cost of hiring one worker= $(6)(1)= $6.
Total labor cost of hiring two workers= $(8)(2)= $16.
Marginal cost of the second worker= $(16-6)= $10.
(c) Total cost of hiring three workers = $(10)(3)= $30
Marginal cost of the third worker = $(30-16)= $ 14.
(d) The firm expands employment until the marginal revenue product no longer exceeds the marginal labor cost. It hires the fourth worker because $24>$18 but not the fifth worker because $14<$22. Hence, 4 workers is the level of employment that maximises firm's profits.
(e) The wage paid to attract the sixth worker is $16 ,the same as for the competitive firm hiring the profit-maximising amount of labor. For the monopsony, only 4 workers are demanded. To attract exactly four workers ,the firm pays the corresponding wage rate i.e $12. A monopsony hires fewer workers at a lower wage rate.
Labor Marginal revenue product Wage rate Total labor cost Marginal labor cost 0 $0 - 0 - 1 20 $6 $6 $6 2 24 8 16 10 3 28 10 30 14 4 24 12 48 18 5 18 14 70 22 6 12 16 96 26 7 6 18 126 30Related Questions
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