Solving Microeconomic Problems for a Local Firn

Assuming the selling price of output is 2 dollars, fill in the values in the table below. 

Marginal Product 

For Labor 0, 

For Labor 1, 

For Labor 2, 

The marginal products of labor 3, 4, 5, and 6 can be calculated similarly. 

The marginal products of labor 3, 4, 5, and 6 are 43, 53, 60, and 65, respectively. 

Total Revenue 

For Labor 0, 

For Labor 1, 

For Labor 2, 

The total revenue for labor 3, 4, 5, and 6 can be calculated similarly. 

The total revenue for labor 3, 4, 5, and 6 are 86, 106, 120, and 130, respectively. 

Value for Marginal Product 

For Labor 0, 

For Labor 1, 

For Labor 2, 

The value of the marginal product for labor 3, 4, 5, and 6 can be calculated similarly. 

The value of the marginal product for labor 3, 4, 5, and 6 are 24, 20, 14, and 10, respectively. 

All the values calculated above are tabulated and are shown in the table below. 

Alternatively, these calculations can be done using excel. 

How many workers would the firm hire if the going wage rate were 27.95 dollars? How many would it hire if the wage rate were 19.95 dollars? Why would the firm not hire more (or less) than the numbers you have chosen? 

If the going wage rate were 27.95 dollars, the firm would hire two workers. This is because the wage rates fall within the VPM of 28. If the wage rate were 19.95, the firm would hire four workers. This is because this wage rate falls within VPM of 20. 

How can you tell that the firm sells its product in a perfectly competitive product market? 

The firm sells its product at a fixed price, which is 2 dollars, regardless of the number of workers employed. This price for the product is determined by the market. This indicates that the firm is a price taker. Thus, since the firm is a price taker, it sells its product in a perfectly competitive product market. 

Construct and interpret the labor demand curve for the firm. Why does it have the shape it has? 

From the graph, it is evident that wages and labor are inversely related. As the wage of workers increases, the number of workers demanded decreases. The linear relationship between wage and labor is because the firm operates in a perfectly competitive product market. 

Assume that the demand for the product produced by the firm increased, driving the price of the product up to 5 dollars. What effect would this have on the number of workers hired by the firm at each of the wage rates mentioned previously? Why? 

If the wage rate were 27.95 dollars, the firm would hire 5 workers. This is because the wage rate falls within a VPM of 35 dollars. If the wage were 19.95 dollars, the firm would hire 6 workers. This is because the wage rate falls within a VPM of 25 dollars. 

Assume that the firm buys a machine for each worker that increases the marginal productivity of each worker, which would be reflected by an increase in the total product, marginal product, and value of marginal product columns. What would traditional economic theory say would happen to the number of workers the firm would be willing to employ at each wage rate? (The downsloping portion of the value of marginal product or marginal revenue product curve is, after all, the firm’s demand for labor curve, and the curve just shifted to the right). Do you agree? Do you think that an increase in the marginal productivity of labor will necessarily result in an increase in employment? Why or why not? 

Based on the traditional economic theory, if the productivity of employees increases, their demand also increases. However, this is never the case. It depends on a number of factors. One of the factors that should be considered is how the farm’s output would be increased. In this case, the productivity of the employees increased with the advance in technology. With this in mind, the demand for workers would decrease because the technology would replace workers.