Question

2. Profit maximization Consider Live Happley Fields, a small player in the strawberry business whose production has no individual effect on wages and prices. Live Happley's production schedule for strawberries is given in the following table: Labour (Number of workers) Output (Kilograms of strawberries) 0 0 1 18 2 34 3 48 4 60 70 5 Suppose that the market wage for strawberry pickers is $170 per worker per day, and the price of strawberries is $12 per kilogram. On the following graph, use the blue points (circle symbol) to plot Live Happley's labour demand curve when the output price is $12 per kilogram. Note: Remember to plot each point between the two integers. For example, when the number of workers increases from 0 to 1, the marginal revenue product of labour for the first worker should be plotted with a horizontal coordinate of 0.5, the value halfway between 0 and 1. Line segments will automatically connect the points.

Answer 1

(a)

MPL = Change in Q / Change in L

Labor demand = MRPL = Output price (P) x MPL

L	Q	MPL	MRPL at P = $12	MRPL at P = $16
0	0
		18	216	288
1	18
		16	192	256
2	34
		14	168	224
3	48
		12	144	192
4	60
		10	120	160
5	70

(b)

300 270 Demand P $12 240 210 Demand P - $16 100 WAGE (Dollars per worker) 150 120 00 30 0 2 3 LABOUR (Number of workers)

(c)

Hiring is profit-maximizing when MRPL >= Wage rate.

When P = 12 and W = 170, firm should hire Two workers.

(d)

When P = 16 and W = 170, firm should hire Four workers.

(e)

Increase in strawberry price will cause Demand for pickers to Increase.

(f)

When P = 16 and W = 200, firm should hire Three workers.