Answers to Practice Questions 9
Question 1:
Add a third column to the table to calculate the marginal revenue product as follows:
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Consider the 4th worker: this worker costs the farmer $9 per day, but he
Question 2:
The profit maximization condition for firm A requires
MFC = MRP. By definition, MRP = MR.MP and in a perfectly
competitive market P = MR. Therefore, MRP for firm A is given
by: MRP = (6)(8) = $48 and from the profit maximization condition,
we get MFC = $48. Since the labor market is perfectly competitive,
MFC for firm B is also $48. Thus, for firm B: MFC = $48 =
MRP = MR.MP = MR.12. Solving for MR, we get MR
= $4 = P (since firm B also operates in a perfectly competitive
market, P = MR).
Question
3:
First, consider
the market for shoes: we can find the market equilibrium using the demand
and the supply equations. The equilibrium price in the market is $50 and
the equilibrium quantity in the market is 50 shoes. Since East Ten is a
perfectly competitive firm, it will take this market price as given and
note that P = MR =$50
for East Ten. The firm hires labor in a perfectly competitive labor market,
and this implies W = MFC.
The perfectly competitive labor market will be in equilibrium when labor
demand equals labor supply, and we can calculate the labor market equilibrium
using the labor demand and labor supply equations: equilibrium wage rate
is $400 per week and equilibrium quantity of workers hired is 200. Also,
the profit maximization condition is MFC = MR.MP.
Thus, 400 = 50(30 – L)
and L =
22.
Question
4:
We need to find the market demand curve. Note that the market demand curve will have a kink since for wages higher than 100 only the automobile manufacturer is in the market. Recall that the market demand curve is the horizontal summation of the individual demand curves. Thus, for wages between 0 and 100, we have the following demand equation: L = 60 – (2/5) W, and for wages between 100 and 200, the demand equation is L = 40 – (1/5) W (note that this is the upper portion of the demand curve of the manufacturer). In order to find the equilibrium, use this demand curve with the supply equation given in the question: equilibrium wage is $50, and a total of 40 workers are hired. The catering firm hires 10 out of these 40 workers and the manufacturer hires the remaining 30.
Multiple Choice Questions: