Question

1. Suppose a firm's hourly marginal product of labour is given by MPN = A(200 – N). Here, A measures labour productivity and N is the number of workers.

1. If A = .2 and the real wage is $10 per hour, how much labour (number of workers N) will the firm want to hire?

2. Suppose the real wage rate rises to $20 per hour. How much labour (number of workers N) will the firm want to hire?

3. With the real wage rate at $10 per hour, how much labour will the firm want to hire if A rises to .5?

Answer 1

MPN = 200A - AN

(a) MPN = (200 x 0.2) - (0.2 x N) = 40 - 0.2N

Hiring is optimal when MPN = W

40 - 0.2N = 10

0.2N = 30

N = 150

(b)

40 - 0.2N = 20

0.2N = 20

N = 100

(c) MPN = (200 x 0.5) - (0.5 x N) = 100 - 0.5N

Hiring is optimal when MPN = W

100 - 0.5N = 10

0.5N = 90

N = 180