Question

1. Suppose ABC Glass Company hires worker to pack glass jars for shipment to customers, the market for glass is competitive and price of glass are $20 per box. ABC hires its worker in a competitive labor market and pay $160/per day. Table below shows worker’s total product per day:

#of workers           Quantity           MP_L                        VMP_L TC_L MFC_L

   hired                  Boxes/day      Boxes/worker $/Day $/Day $/Worker

10	140	14	280	1600	160
20	260	12	240	3200	160
30	360	10	200	4800	160
40	440	8	160	6400	160
50	500	4	80	8000	160

2. How many workers should ABC hire to maximize profit?

3. If due to shortage of labor wage increases to $200/day, how should ABC react?

4. If market demand for packing glass jar increase by 100 boxes per day, what ABC needs to do to insure it can handle the demand and maximize its profit?

2. Suppose a stamping factory is the only employer in town and the table below indicate the number of employees who would be willing to work at the wage offered by the company:

Labor (#of workers in 1000)	Wage ($ per hour)	Total Labor Cost in 000 $	Marginal cost of Labor
1	10
2	15
3	20
4	30
5	40

1. Complete the table.

2. Graph the marginal cost of labor

3. Suppose the VMP_L = 40 – 5L, plot the VMP_Lin the same graph

4. How many labors this factory would hire and what will be the wage they would pay?

5. Suppose the workers would form a union and use the collective bargaining, what will be the wage and number of workers employed?

Answer 1

Ans.1

a) ABC should hire workers where the value of marginal product of labour is equal to the marginal factor cost of labour, thus, this is 40 workers. This will maximize firm’s profit.

b) Increase in wage, increases marginal factor cost of labour to $200, thus, the new number of worker at which VMPL equals MFCL is 30 workers

c) Increase in demand for packing glass jar, leads to increase in prices which increases the VMPL as VMPL is price multiplied by MPL. This makes VMPL> MFCL, hence, the firm will employ more labour till the point VMPL is again equal to MFCL.

Ans 2

Total Cost = TC = Wages(w)*Number of workers(L)

Marginal Cost = MC = Change in TC/ Change in L

Table

L. w. TC. MC

1 10 10 10

2 15 30 20

3 20 60 30

4 30 120 60

5. 40. 200. 80

d) Factory will hire workers where MC and VMPL curve intersect i.e. point E. This gives us equilibrium wage as $25 and quantity of workers employed as 2.5 which is not possible, so, it will employ 2 workers at $15 each. As at 2 workers VMPL ($30)> MC($20) but at 3 workers VMPL($25) < MC($30)

e) If workers will form a union, it will increase the collective bargaining power of the labourers increasing wage per worker and increase the MC of workers which will lead to lower employment of workers by the company.