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2.
Assume that a firm produces Q using one fixed input, capital, and one
variable input, labor. The firm can sell all of the Q it produces at a market
price of $3 each, can hire all of the workers it wants at a market
wage rate of $11 each, and has fixed costs of $10. It faces the following
production schedule.
P = $3
W = $11
FC = $10
A) In what kind of market structure does this firm sell its Q? How can you tell?
Perfect Competition. The firm sells each & every
product at the same price. The firm is a price taker
and will take the market price.
2.
Assume that a firm produces Q using one fixed input, capital, and one
variable input, labor. The firm can sell all of the Q it produces at a market
price of $3 each, can hire all of the workers it wants at a market
wage rate of $11 each, and has fixed costs of $10. It faces the following
production schedule.
P = $3
W = $11
FC = $10
B) In what kind of market structure does this firm hire its employees? How can
you tell?
Competitive Labor Market The firm pays each and every
worker the same wage. The firm is a wage taker and will pay
the market wage.
Number of
Employees
0
1
2
3
4
5
6
Total
Output
0
14
26
35
42
46
48
Marginal
Product (MP)
0
14
12
9
7
4
2
Number of
Employees
0
1
2
3
4
5
6
Total
Output
0
14
26
35
42
46
48
Marginal
Revenue MR = $3
Product
Marginal
Product (MP) (MP x MR) Wage
0
14
12
9
7
4
2
0
42
36
27
21
12
6
11
11
11
11
11
11
C) Using marginal revenue product analysis, how many
employees should this firm hire to maximize short-run
profits? MFC = MRP. The MFC = wage rate.
W = $11. The firm will hire 5 workers, but not 6
Number of
Employees
0
1
2
3
4
5
6
Total
Output
0
14
26
35
42
46
48
Marginal
Revenue
Product
Marginal
Product (MP) (MP x P)
0
14
12
9
7
4
2
0
42
36
27
21
12
6
P = $3
Wage
11
11
11
11
11
11
D) Based on your answer in Part c), how many units of Q
will this firm produce?
Number of
Employees
Total
Output
5
46
Marginal
Revenue
Product
Marginal
Product (MP) (MP x P)
4
12
Wage
11
E) At the level of output you identified in part (d), is the firm
earning an economic profit, a normal profit, or suffering a
loss? How can you tell?
P x Q = TR
5 workers x $11 =
Fixed cost of $10
TC
$3 x 46 = $138
TR = $138
-TC =
65
Profit =
$ 73
$55 (variable cost)
10
$65
Input Market for 1-firm
Total Input Market
Price
of input
MFC = S
Price
Labor
MFC = S
MRP = D
Quantity of
Input
MRP = D
Quantity
If demand for workers ↑
1) Market Demand curve for workers shifts right
2) Wage Rate ↑
3) MFC for individual firm shifts upward
Input Market for 1-firm
Total Output Market
Price
of input
MFC = S
Price
Labor
MFC = S
MRP = D
MRP
Quantity of
Input
MRP = D
Quantity
Firms with market power will have a MRP
Curve below a competitive firm