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For the production schedule of a perfectly competitive firm given below, answer the following: Units of labor Total output Units of labor Total output 1 7 4 19 2 12 5 21 3 16 6 22 a
For the production schedule of a perfectly competitive firm given below, answer the following:
| Units of labor | Total output | Units of labor | Total output |
| 1 | 7 | 4 | 19 |
| 2 | 12 | 5 | 21 |
| 3 | 16 | 6 | 22 |
a. If the price of output is $50 per unit, find the specific values for the marginal revenue product and the quantity of labor the firm hires if the market wage is $75,
b. If the price of output changes to $30, explain how this changes the results in a),
c. Explain how it is possible that the changes in b) lead to lower market wages for this type of labor.
Expert Solution
A: 5 units of labor
We first find the marginal product of labor which is the change in total output from one level of labor to the next. We the calculate marginal revenue by multiplying MPL by price. The firms will increase labor until marginal revenue is less than wages which happens when labor increases to 6 units and thus the firm produces with 5 units of labor.
| Units of labor | Total output | MPL | MR |
| 1 | 7 | 7 | 350 |
| 2 | 12 | 5 | 250 |
| 3 | 16 | 4 | 200 |
| 4 | 19 | 3 | 150 |
| 5 | 21 | 2 | 100 |
| 6 | 22 | 1 | 50 |
B: 4 units of labor
We do the exact same process as above but use $30 as our price to get the table below and a quantity of labor of 4.
| Units of labor | Total output | MPL | MR |
| 1 | 7 | 7 | 210 |
| 2 | 12 | 5 | 150 |
| 3 | 16 | 4 | 120 |
| 4 | 19 | 3 | 90 |
| 5 | 21 | 2 | 60 |
| 6 | 22 | 1 | 30 |
C:
Workers add less value at a price of $30 and thus the quantity supplied of labor is lower which can mean lower wages.
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