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

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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