Question

Labor	Output	Price (D1)	Price (D2)
0	0	$10.00	$10.00
1	16	10.00	9.50
2	31	10.00	9.00
3	45	10.00	8.50
4	58	10.00	7.50
5	69	10.00	6.50
6	78	10.00	5.50

Assume that the labor market is perfectly competitive. Suppose the firm’s product demand is given by the column labeled D₁. If the wage rate is $125, the firm will achieve maximum profit by hiring _____ workers.

3

5

4

6

Answer 1

MPL = Change in output/ Change in labor

VMPL = Price * MPL

Labor	Output	PRICE (D1)	MPL (Marginal product of labor	VMPL (Value of Marginal product of labor)
0	0	10
1	16	10	16	160
2	31	10	15	150
3	45	10	14	140
4	58	10	13	130
5	69	10	11	110
6	78	10	9	90

A firm hires labor until VMPL is greater than or equal to wage rate

Wage rate = 125

VMPL is 130 at 4 labor (130>125) and 110 at 5 labors (110<125)

So firm will hire only 4 labors