Question

8. The marginal product of labour for a certain firm is MPN = 50 - N, where N is the number of labour hours used in production. The price of output is $2 per unit, a) If the nominal wage is $10/hour, how many hours of labour will be demanded by the firm? b) If the nominal wage is increased to $12/hour, how many hours of labour will be demanded by the firm? c) What is the wage elasticity of labour demand for this wage change? (Use the midpoint formula to calculate the arc elasticity.)

Answer 1

a)

Marginal revenue should be equals to marginal cost per hour.

Therefore, $10 per hour =

MRPN=(50-N)*2

10 = (50-N)*2

10/2 = 50-N

5 = 50-N

N = 50-5

N = 45

b)

Marginal revenue should be equals to marginal cost per hour.

Therefore, $12 per hour = MRPN=(50-N)2

12 = (50-N)2

12/2 = 50-N

6 = 50 - N

N = 50 - 6

N = 44

c) Wage elasticity mid point formula = [(44-45)/ ((44+45)/2)] / [ (12-10) / ((12+10)/2)]

= -0.12359