Question

assume that the following table represents the daily supply of labor at a shirt factory in Haiti – and that labor’s marginal revenue product (MRP) is a constant amount of one hundred ten dollars ($110) per day over the relevant range of hiring considerations.

Q_Labor        W = ACF          TCF                 MCF = ∆TCF/∆Q_Labor

                _{--------------------------------------------------------------------------------------------------------------}

                30              $40/day                $1,200

          ---------------------------------------------------------        $ 800/10 = $ 80

          40               $50/day                $2,000

          ---------------------------------------------------------        $1,000/10 = $100

50              $60/day                $3,000

          ---------------------------------------------------------        $1,200/10 =

          60              $70/day                $4,200

          ---------------------------------------------------------        $

          70              $80/day                $

          Based upon the information above, which of the following statements is correct?

          a.       This appears to be a competitive labor market (-one that resembles perfect

competition-).

          b.       The firm will maximize profit off the use of labor by hiring 50 workers.

          c.       A wage rate of $110 per day will maximize this firm’s profit.

          d.       These workers will be paid an amount greater than the value of their marginal

output (MRP).

Answer 1

Marginal revenue product of labour is $110 (constant)

Whereas the Marginal cost, i.e., delta (TCF) / delta (Q) is increasing with additional labor quantity as the wage rate is going up with more hiring.

So this is not a competitive labor market, because the price (wage rate) is constant in a competitive market.

The marginal cost with 50 workers is $100 and for 60 workers it is $120, whereas MRP is $110, hence profit will be maximized at this level (Q=50). This is the right answer.

A wage rate of $110 per day will make the firm break even (since MRP is also $110) and hence it will not maximise the firm's profit

These workers will be paid an amount greater than their MRP is also incorrect since they are getting paid less than $110.