Question

The table below provides the production information for Stacey's Soda Shack. Stacey hires workers in a competitive labor market and can hire workers to help make and bottle her soda for $20 a day. She sells her soda for $1 each. 1. Total Output Workers 50 90 120 140 150 6 159 (b) Given the above production information, address each of the following. i. Draw a graph showing Stacey's Soda Shack's demand and supply for workers. ii. Use your graph in part (i) above to explain how Stacey will determine how many workers she will hire in order to maximize her profit and use her labor force. State how many workers Stacey will hire. Answer: Assume that Stacey's sodas are a normal good. If consumer income increases, how will Stacey's hiring decision change? Specifically, use appropriate graphs to explain how: i. The income increase will affect the quantity of sodas sold in the market. ii. Stacey's demand for workers will change as a result of this consumer income increase. i. The wage rate paid to Stacey's employees will change. iv. The number of workers Stacey actually hires will change. Answer:

Answer 1

Answer to Question No. 1

The firm will hire at a point where the marginal revenue product (product of MP(Change in Total Output/Change in Quantity) and Price). The point where the MRP or the labor demand curve intersects the wage curve will be the profit max hiring point. In this case, Stacey’s Soda Shack will hire 4 workers and produce an output of Q* = 140 units.

Workers	Total Output	MP	Wage	MRP
0	0		20	0
1	50	50	20	50
2	90	40	20	40
3	120	30	20	30
4	140	20	20	20
5	150	10	20	10
6	159	9	20	9

Workers Total Output MP Wage MRP 20 50 50 20 50 90 40 20 40 120 30 20 30 4 140 20 20 20 150 20 10 10 6. 159 20 60 50 40 30 10 Workers MRP Wage Marginal rewenue Product