Labor Market VMP=MR x MP Value of Marginal Product A perfectly competitive firm

ID: 1190451 • Letter: L

Question

Labor Market

VMP=MR x MP
Value of Marginal Product

A perfectly competitive firm sells its lattes at $3 a glass (Marginal Revenue).

a. If the going market wage is $36 per day, the firm will hire ______ workers per day and produce ________ units of output.

b. Given your answer to part b, the firm will have total revenues of ____ per day and total costs of _______ per day.

c. The above will result in (profit, loss) of $_____ per day.

d. Identify the market equilibrium. We=_____ Le=____

Labor Input
(Workers/Day) Total Product
(Lattes/Day) Marginal Product

VMP=MR x MP
Value of Marginal Product

0 0 1 22 22 2 40 18 3 56 16 4 70 14 5 82 12 6 92 10 7 100 8 8 106 6

a) Firm will produce at the level where VMP = wage. When 5 units of labour is used, VMP = wage = $36.

Thus firm will hire 5 workers per day and produce 82 units per day.

b) Firm will have total revenue = $3 * 82 = $246 and total cost = $36 *5 = $180

c) Profit = TR - TC = 246 - 180 = $66

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