Only labour is used to produce mugs, which sell for $5 each. Labour is hired under...

Only labour is used to produce mugs, which sell for $5 each. Labour is hired under perfectly competitive conditions and the market wage is $22.50per hour. Theproductionfunctionfor mugs are given by the following table:

number of workers	mugs per hour
0	0
1	12
2	22
3	28
4	33
5	37
6	40

a) Augment the table by calculating the marginal product of labour, total revenue, and marginal revenue product of labour. (Remember to put marginal items in between units.)

b) At the market wage, how many workers will the firm hire in order to maximize profit?

c) Suppose that a shortage of workers causes a competitive wage for workers who can make coffee mugs to rise to $27.50 per hour. Now, how many workers will this firm hire?

d) Suppose that schools that teach pottery skills increase the supply of workers that can make coffee mugs, which lowers the competitive wage for coffee mug workers to $17.50 per hour. Nowhowmanyworkers will the firm hire? Does this represent a shift in the firm’s demand for labour curve or a movement along with the firm’s demand for labour curve?

e) Suppose instead that the demand for coffee mugs rises, pushing up the price of coffee mugs to $10 per mug. If the competitive wage for coffee mug workers remains at $27.50 per hour, how many workers will this firm hire now? Does this represent a shift in the firm’s demand for labour curve or a movement along with the firm’s demand for labour curve?

Solutions

Expert Solution

Number of Workers	Mugs Per Hour	Marginal Product	Marginal Revenue Product (@$5)	*Total Revenue (Price of $5 Quantity)**
0	0			0
1	12	12	60	60
2	22	10	50	110
3	28	6	30	140
4	33	5	25	165
5	37	4	20	185
6	40	3	15	200

b) The firm will hire workers to maximize profit until Marginal Revenue Product of Labor is greater than the Wage Rate. Here, Till 4th worker MRPL > Wage Rate. ($22.50). So, Firm will employ 4 workers.

c) At wage rate of $27.50 Firm will employ 3 workers following the rule that firm employs workers till MRPL > Wage Rate.

d) At wage rate of $17.50 per hour Firm will employ 5 workers because till 5th workers MRPL > Wage Rate ($17.50). This is the movement along the firm's demand curve because value of marginal product of labor for each worker is same but the wage facing them has changed.

e) All 6 workers can be hired because with the rise in price to $10 the marginal revenue product of all workers have risen (MRPL is 120, 100, 60, 50, 40, 30, respectively for all workers from 0 to 6). MRPL > Wage rate of $27.50 for all workers.This is shift of the demand curve for labor because the MRPL has increased for each worker because price of output rose.

Rahul Sunny answered 1 year ago

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