Question

Suppose you own a small strawberry farm. You employ unskilled workers to pick, sort out, and pack the strawberries. Workers can pack the following amounts of strawberry in an hour.   

                Labor                Quantity of strawberry (pounds)

                 0                               0

                1                              20

                2                              50

                3                             90

                4                              120

                5                              145

                6                              165

                7                              180

                8                              190

You can sell your strawberries for 50 cents a pound and the wage rate for packers is $7.50 an hour. Use the marginal analysis for optimal use of inputs to answer the following questions.

a. How many labor hours do you employ? Why?

b. Suppose that the price of the strawberries falls to 33.33 cents but that the wage rate of packers remains the same at $7.50 an hour. How many labor hours would you employ?

c. Suppose wage increases to $10 an hour but the price of strawberries remains the same. How many labor hours would you employ?

Answer 1

a) The number of labors employed is the point where the marginal product of labor is equal to the wage of the labour.

We can see that the marginal product from 7 th labour is 15 pounds of labor , which is equal to $7.50 and this is equal the wage of each labor. So 7 labourers will be employed.

b) If the price reduces to 33.33 cents per pound and the wage rate remains the same, we will employ only 5 labourers. This is because the marginal product from 5th labour is 25 pounds of strawberries, which is equal to $8.33, which is greater than the wage of the labour. For the 6th worker, the marginal product is only 20 pounds of strawberries, which is equal to $6.67, which is less than the wage of the labour.

c) If the price remains unchanged  and the wage rate increases to $10 an hour, we will employ only 6 labourers. This is because the marginal product from 6th labour is 20 pounds of strawberries, which is equal to $10, which is equal to the wage of the labour.