7. Suppose that in a competitive output market, firms hire labor from a competit

Question

7. Suppose that in a competitive output market, firms hire labor from a competitive labor market (so that the profit maximization conditions for hiring labor are as we discussed in class). The firm has a fixed number of machines and can produce the following quantities (C) associated with the number of workers (L) in a given hour. 2 114 26 2 3 4 36 50 The market price of the good this firm sells is $3. If the firm pays a wage of W many units of labor should this firm hire to maximize profit? $23 per hour, then how a. b. 2 c. 3 d. 4 e. 5 8. Suppose that in a competitive output market, firms hire labor from a competitive labor market (so that the profit maximization conditions for hiring labor are as we discussed in class). If the demand for the product these firms sell increases, so that the market price of this product increases, we would expect a. a decrease in equilibrium wage we, and no change in equilibrium quantity of labor, L' b. a decrease in we, and an increase L c. an increase in we, and a decrease L d. a decrease in we, and a decrease L' e. an increase in, we, and an increase in L

Explanation / Answer

Q7. Answer is d. 4. Explanation: L Q MC MP MR 0 0 0 0 0 1 14 23 14 42 2 26 23 12 36 3 36 23 10 30 4 44 23 8 24 5 50 23 6 18 Therefore, MR is >= MC at L =4. Hence, the firm must employ 4 hours only. Q8. Answer is e. Increase in W and increase in L. Explanation: The demand for product results in increased demand of labor resulting n upward presurre on price. Hence the equilibrium wage rate increases. This results in expansion of supply of labor resulting increased labor employed.

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