Question

In: Economics

b) Suppose that the nominal wage you pay each worker is $300 and that the price of your output is $12.

Number of workersunits of outputMPNReal Marginal ProfitReal Profit
0



140


275


3105


4130


5150


6165


7175


b)  Suppose that the nominal wage you pay each worker is $300 and that the price of your output is $12. How many workers will you hire and what would be your real profit? Note that if you break even on the worker, you will hire them! Also, just like the in-class example, you can hire all the workers you want at the wage = $300.

In the space below, draw a graph with the production function on top and the real labor market below, in real space, not nominal space, locating the profit maximizing point as point A. Also, be sure to shade in the real profits, just like we did in class. (20 points for correct and completely labeled diagram.

Now suppose there is a technical innovation, an increase in total factor productivity so that the MPN for each worker goes up by 10. In addition, at the same time, tight labor markets force you to pay each worker $360. The price of your output stays constant at $12.

C. fill in table

Number of workersunits of outputMPNReal Marginal ProfitReal Profit
0



1



2



3



4



5



6



7








d)(5 points) How many workers will you hire now and what is your real profits?

Add these new conditions to your production function and labor market and label as point B. Make sure you label your graph completely.

e)(5 points) Is your firm better off? Why or why not?


f)(5 points) Are workers better off? Name two reasons.


g)(5 points) What has happened to personal income tax revenue for the government? What has happened corporate tax revenue for the government? Explain.


h)(5 points) What were nominal profits before the change in productivity/wages and what are nominal profits now?

Solutions

Expert Solution

b. ANSWER:

Number of workers units of output MPN Real Marginal Profit Real Profit
0 0
1 40 40 15 15
2 75 35 10 25
3 105 30 5 30
4 130 25 0 30
5 150 20 -5 25
6 165 15 -10 15
7 175 10 -15 0

given Price level=$12

nominal wage=$300

hence,real wage= $300/$12=25

Marginal real profit=MPN-real wage=MPN-$25

Total real profit=total product-real wage=total product-25

from the table, it is clear that profit is maximised at level 30.

hence 4 labours will be hired as the marginal profit is zero there and beyond that profit will fall(break even point).

LABOUR MARKET GRAPH

yellow shaded part is the profit of the firm.

C. SOLUTION:

Number of workers units of output MPN Real Marginal Profit Real Profit
0
1 50 50 20 20
2 95 45 15 35
3 135 40 10 45
4 170 35 5 50
5 200 30 0 50
6 225 25 -5 45
7 245 20 -10 35

now nominal wage=$360

price level=$12

hene real wage=30

Now real profit is 50 and workers hired is 5.

PRODUCTION FUNCTION GRAPH

LABOUR MARKET

YELLOW SHADED PART=PROFIT

e. yes, firm is now better off. because total profit increased as well as total production is also increased hence market share of the firm also increased.

f. answer: Workers are now better off.

because: 1. they are earning higher wage.

2. the number of workers employed are more.

h. answer; nominal profits before=$25x30=$750(price multiplied by real profit)

nominal profit now=$30x50=1500


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