Question

5. (Table: Abracadabra Processors Ltd.) Number of Workers Number of Computer Chips Produced 900 1.250 1,550 1,800 2.000 2,150 2.250 (4 pts.) Refer to the figure. Knowing that each computer chip produced sells for $350: A) What is the marginal product of the 5th worker? B) Suppose that unions enter the industry, workers become unionized, and wages rise from $45,000 to $60,000 per year. How many workers will Abracadabra hire? C) The marginal product of labor generally (increases/decreases) as more labor is hired. Why? D) Why will the firm hire the same amount of workers when the wage is between $35,000 to $45,000 per year, but not at $55,000 per year?

Answer 1

A) Marginal product of 5th worker = Total product of 5th worker - Total product of 4th worker = 1550 - 1250 = 300

B) Hire till wage = marginal value product ,

Marginal value product = Product Price * marginal product = $350 * marginal product

So , 60,000 = 350 * MP

or, MP = 172 ( approx ) . Company will hire till 7th worker ( Marginal product of 7th worker = 200 , which is nearest )

C) decreases . This happens due to law of diminishing marginal product of labor . In short run , when capital is fixed , the more labor we keep on hiring , the process gets saturated at a point and the marginal product of each extra labor added starts to fall .

D) The amount of worker hired depends upon marginal value product of labor . When wage is low , more workers can be hired since even if marginal value product falls due to law of diminsing marginal product , it covers the wage . The opposite happens when wage is high .