Question

Labor and Wages The following chart provides information on a firm that hires labor competitively and sells its product in a competitive market. Units of Labor Total Output Product Price OWN+ a. How many units of labor would be employed if the market wage rate were $40? Why? b. What would happen to employment if the wage rate rose to $50? Explain your answer.

Answer 1

To answer the question we 1st need to get the MPP, TR and MRP

where, MPP or the Marginal physical product ie the extra unit of output that one additional unit of labor produces.

(Total output of _n- Total output of _n-1)

TR or Total revenue is total income from selling the product ie (Total output x Product price )

MRP is the marginal revenue product ie the additional revenue received from one additional units of labor

ie (TR_n-TR_n-1)

Units of Labor	Total Output	Product price	MPP	TR	MRP
1	14	5	14	(14*5)= 70	70
2	26	5	(26-14)=12	(26*5)=130	(130-70)=60
3	37	5	(37-26)= 11	(37*5)=185	(185-130)= 55
4	46	5	(46-37)= 9	(46*5)=230	(230-185)= 45
5	53	5	(53-46)= 7	(53*5)=265	(265-230)= 35
6	58	5	(58-53)= 5	(58*5)= 290	(290-265)= 25

a)The company will hire labour till the wage is less than or equal to the Marginal Physical Product thus at $40 he will hire 4 units of labour because thill 4th unit of labour the MRP is $45 but the MRP of 5th unit is $35 which is less than the wage. so 5th and 6th unit will not be hired.

b) if the wage rate rose to $50 then only 3 units of Labor will be hired because the 4th unit of labour's MRP is $45 which is less than the wage rate which means he has to be paid more than what he is producing which will not be profitable to the firm thus he will hire only 3 units of Labor at $50.