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Refer to the table below
Refer to the table below. This firm sells output in a competitive product market at an equilibrium price of $3. If the competitive wage for a unit of labor is $45, how many units of labor will be employed?
a. 2
b. 3
c. 8
d. 5
e. 4
| Units of Labor | Marginal Product of Labor (MPL) |
| 1 | 24 |
| 2 | 21 |
| 3 | 18 |
| 4 | 15 |
| 5 | 12 |
| 6 | 9 |
| 7 | 6 |
| 8 | 3 |
Expert Solution
The correct answer is Option e or 4 units of labor.
The equilibrium amount of labor for a competitive firm is determined when VMPL = w, where,
- w = wage rate
- VMPL = Value of marginal product of labor = P * MPL
Based on the given data above, w = $45, P = $3. The table below shows VMPL calculations for each unit of labour:
| Units of Labor | MPL | Price ($) | VMPL | w |
| 1 | 24 | 3 | 72 | 45 |
| 2 | 21 | 3 | 63 | 45 |
| 3 | 18 | 3 | 54 | 45 |
| 4 | 15 | 3 | 45 | 45 |
| 5 | 12 | 3 | 36 | 45 |
| 6 | 9 | 3 | 27 | 45 |
| 7 | 6 | 3 | 18 | 45 |
| 8 | 3 | 3 | 9 | 45 |
It can be observed that VMPL = w where 4 units of labour are employed.
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