Question

Answer the next question on the basis of the information given in the following table.                                                                                     2 points Employment Total Product Product Price 0   0 $3 1 12 3 2 22 3 3 30 3 4 36 3 5 40 3 6 42 3 If the firm is hiring workers under purely competitive conditions at a wage rate of $22, it will employ

Answer 1

In order to maximize profit a firm hires that amount of labor where Marginal Revenue product (MRP) = wage rate and if there is no such amount of labor where MRP = wage rate then he should hire that amount of labor where MRP is just greater and closest to wage rate.

Formula :

Marginal Revenue product (MRP) = P*MP

Here P = 3 => MRP = 3*MP

MP(L) = TP(L) - TP(L - 1) where MP(L) = marginal product of Lth unit of worker and TP = Total Product when L units of worker are hired.

Thus MRP = wage rate

=> 3MP = 22 => MP = 7.33

We can see from above that there is no L such that MP = 7.33

Thus he will hire that amount of labor where MRP is just greater and closest to wage rate i.e. MRP > wage => 3MP > 22 => MP > 7.33

MP(3) = TP(3) - TP(2) = 30 - 22 = 8 => MP > 7.33

MP(4) = TP(4) - TP(3) = 36 - 30 = 6 => MP < 7.33

Hence amount of L for which MP is just greater and closest to 7.33 or MRP is just greater than wage rate is L = 3.

Hence This firm will employ 3 workers