Question

1. A firm producing hot dogs finds the following production function. Each sale generates $2 in extra revenue.

Labor	Number of hot dogs	MPL	MRPL
0	0
1	15
2	25
3	32
4	36
5	38
6	39

1. Fill in the table above
2. Why is there diminishing marginal product of labor? List the two reasons.

3. If wages are $10 per hour (that’s minimum wage plus benefits cost per hour), how many workers should be hired? ______________
4. If wages increase to $20 per hour (the new higher minimum wage plus benefits), how many workers should be hired? ______________
5. If wages increase, what might the firm do in the long run that is not possible in the short run to address the higher wages?

Answer 1

a) Marginal product of labor MPL is the addition made to total product / number of hot dogs for each additional worker hired. MRP is MPL x MR where MR is fixed at 2.

Labor	Number of hot dogs	MPL	MRPL
0	0
1	15	15	30
2	25	10	20
3	32	7	14
4	36	4	8
5	38	2	4
6	39	1	2

b) There is a diminishing marginal product of labor because primarily, as more workers are added, congestion increases which makes coordination difficult. Also, each additional labor uses the same unchanged capital / machines so productivity per worker falls.

c) If wages are $10 per hour, 3 workers should be hired because MRPL must be higher than or equal to MC which is the wage rate.

d) If wages increase to $20 per hour 2 workers should be hired since MRPL is 20 for 2 workers

e) If wages increase, in the long run firm will use more machines and fewer labor units because labor is now expensive.