Question

The supply and demand for labor

Tired of her job at the Idaho Housing Authority, Jennifer Scoggins buys 500 acres of farmland. She grows corn in a competitive industry, earning $3 a bushel. Her production function for corn is shown below.

Number of Workers	Bushels of Corn Produced Per Year
0	0
1	30,000
2	43,000
3	51,000
4	55,000
5	57,000
6	58,000

1. Calculate the marginal product of labor and the value of the marginal product of labor for Jennifer’s farm.
2. If the wage per worker is $8,000 per year, how many workers will Jennifer hire? Please explain your answer.
3. The wage for farm workers is $8,000 and the fixed rent is $600 per acre per year. There are no other costs. Calculate Jennifer’s profits or losses.
4. Will there be entry or exit into this industry? Please explain why.

Answer 1

Ans. Marginal Product of labour, MPL = Change in Corn produced (TP)/ Change in number of workers (L)

and Value of Marginal Product of labour, MRPL = Price of Corn ($3) * MPL

L. TP. MPL. MRPL

0 0 - -

1 30000 30000 90000

2 43000 13000 39000

3 51000 8000 24000

4 55000 4000 12000

5 57000 2000 6000

6. 58000. 1000. 3000

b) If wage rate is $8000, then the company will hire the last worker whose value of marginal product is greater than or equal to wage paid i.e. revenue generated by last worker is more than or equal to cost incurred for employing him and if more workers are hired, the wage will exceed the MRPL.

Thus, Jennifer will hire 4 workers having MRPL of $12000.

c) Total production from 4 workers = 55000 bushels

=> Revenue generated, TR = $165000

Cost of labour, V = 4*8000 = $32000

Rent of land, F = 600*Number of acres = 600*500 = $300000

=> Profit = TR - V - F = 165000 -32000 - 300000 = - $167000

Thus, the farmer incurs an economic loss of $167000

d) As the farmer is earning a loss, so, firms will exit the industry in long run which will decrease the supply of corn in the market increasing price of corn till the point where all the farmers earn a normal profit.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.