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 1 year ago

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