Total Labor Units (employees) Price per Frame $10 $10 $10 $10 $10 $10 Total Prod
ID: 1106097 • Letter: T
Question
Total Labor Units (employees) Price per Frame $10 $10 $10 $10 $10 $10 Total Product (frames per day) 10 30 70 82 a) Where does diminishing marginal returns to labor begin? b) The marginal revenue product of which worker is $150 c) If workers are paid $120 per day, then the firm will profit maximize when it hires how many workers? d) If the firm currently has 2 workers and the current wage is $140, what should the firm do? e) If the firm is profit maximizing with three workers, and the price of the product increases to $17 per unit, what should the firm do? (Ctrl)"Explanation / Answer
We have the following information
Total labor units (employees)
Total product (frames per day)
Marginal product of labor
Price per frame ($)
Value of Marginal Product of labor ($) (Marginal product of labor × Price)
0
0
-
10
-
1
10
10
10
100
2
30
20
10
200
3
55
25
10
250
4
70
15
10
150
5
82
12
10
120
Part a) The diminishing marginal returns to labor begins when total output reaches 70 and total labor units reaches 4.
Part b) Since the price is constant at $10 so the marginal revenue is also $10. Marginal revenue product is calculated by multiplying marginal product of input by the marginal revenue.
The marginal revenue product of 4th worker is $150.
Part c) The profit maximization point for the firm is where the value of marginal product labor is equal to the wage rate. It is given that the wage rate is $120. So, the firm will hire 5 units of labor to maximize profit.
Part d) For 2 units of workers the value of marginal product is $200 which is higher than the wage rate of $140. So, total output can be increased further by the firm by employing more workers. So, the firm should hire more workers to expand output.
Part e) With three workers value of marginal product is $250, which means the wage rate is also $250 as at the profit maximizing point the value of marginal product equals the wage rate. Now, if the price of product increases to $17 then the value of marginal product will increase to (25 × 17 = $425). So, the firm should hire more workers to expand output.
Total labor units (employees)
Total product (frames per day)
Marginal product of labor
Price per frame ($)
Value of Marginal Product of labor ($) (Marginal product of labor × Price)
0
0
-
10
-
1
10
10
10
100
2
30
20
10
200
3
55
25
10
250
4
70
15
10
150
5
82
12
10
120