Question

Labor Output Price (D1) Price (D2) 0 0 $10.00 $10.00 1 16   10.00     9.50 2 31...

Labor

Output

Price (D1)

Price (D2)

0 0 $10.00 $10.00
1 16   10.00     9.50
2 31   10.00     9.00
3 45   10.00     8.50
4 58   10.00     7.50
5 69   10.00     6.50
6 78   10.00     5.50

Assume that the labor market is perfectly competitive. Suppose the firm’s product demand is given by the column labeled D1. If the wage rate is $125, the firm will achieve maximum profit by hiring _____ workers.

3

5

4

6

0 0
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Answer #1

MPL = Change in output/ Change in labor

VMPL = Price * MPL

Labor Output PRICE (D1) MPL (Marginal product of labor VMPL (Value of Marginal product of labor)
0 0 10
1 16 10 16 160
2 31 10 15 150
3 45 10 14 140
4 58 10 13 130
5 69 10 11 110
6 78 10 9 90

A firm hires labor until VMPL is greater than or equal to wage rate

Wage rate = 125

VMPL is 130 at 4 labor (130>125) and 110 at 5 labors (110<125)

So firm will hire only 4 labors

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