Question

In: Economics

Presuming a 40-hour work week, consider the following information. Units of        Units of   ...

Presuming a 40-hour work week, consider the following information.

Units of        Units of   

Labor           Output     

0           0   

1           500   

2           750

3           900

4           1,000

5           1,050

6           1,075

7           1,085

8           1,085

A. If the firm can sell its output at a price of $5 per unit, then how much labor will be hired at a weekly wage rate of $500? Show why this quantity of labor is best for the firm. (12 points)

B. Suppose a minimum hourly wage of $15 is imposed. Now, how much labor will be hired? Show why this quantity of labor is best for the firm. In this case is labor demand elastic or inelastic? Demonstrate and explain. (8 points)

Solutions

Expert Solution

A. The output is sold at a price of $5 per unit. Find the marginal product as the addition to the total product and then find the marginal revenue product which is = MP x price

Now see that optimum rule is to hire worker till MRP = wage rate, then a total of 4 workers will be hired at a weekly wage rate of $500. This is the bese number because beyond this the profit is maixmum in this case.

B. Suppose a minimum hourly wage of $15 or $15*40 = $600 weekly wage is imposed. At this rate 3 labor units will be hired because then the profit is maximum at L = 3 Labor demand is inelastic because wage rate is increased by 100 but demand is reduced by 1 labor unit.

Labor hours Total outout Marginal product MRP Wage Profit
0 0 0 500 0
1 500 500 2500 500 2000
2 750 250 1250 500 2750
3 900 150 750 500 3000
4 1000 100 500 500 3000
5 1050 50 250 500 2750
6 1075 25 125 500 2375
7 1085 10 50 500 1925
8 1085 0 0 500 1425
Labor hours Total outout Marginal product MRP Wage Profit
0 0 0 600 0
1 500 500 2500 600 1900
2 750 250 1250 600 2550
3 900 150 750 600 2700
4 1000 100 500 600 2600
5 1050 50 250 600 2250
6 1075 25 125 600 1775
7 1085 10 50 600 1225
8 1085 0 0 600 625

Rahul Sunny answered 2 years ago
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