Microeconomics Question #2

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. W = $11 FC = $10 P = $3 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 Total Employees Output 0 0 1 14 2 26 3 35 4 42 5 46 6 48 Marginal Product (MP) 14 12 9 7 4 2

Marginal Revenue Product (MP x MR) MR = $3 Number of Total Employees Output 0 0 1 14 2 26 3 35 4 42 5 46 6 48 Marginal Product (MP) Wage 11 14 42 11 12 36 11 9 27 7 11 21 4 11 12 2 6 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

D) Based on your answer in Part c), how many units of Q Marginal Revenue Product (MP x P) P = $3 Number of Total Employees Output 0 0 1 14 2 26 3 35 4 42 5 46 6 48 Marginal Product (MP) Wage 11 14 42 11 12 36 11 9 27 7 11 21 4 11 12 2 6 11 D) Based on your answer in Part c), how many units of Q will this firm produce?

TR = $138 -TC = 65 Profit = $ 73 Marginal Revenue Product (MP x P) Number of Total Employees Output Marginal Product (MP) Wage 5 46 4 12 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? 5 workers x $11 = $55 (variable cost) Fixed cost of $10 10 TC $65 P x Q = TR $3 x 46 = $138 TR = $138 -TC = 65 Profit = $ 73

Input Market for 1-firm Total Input Market If demand for workers ↑ 1) Market Demand curve for workers shifts right 2) Wage Rate ↑ 3) MFC for individual firm shifts upward

Firms with market power will have a MRP Curve below a competitive firm Input Market for 1-firm Total Output Market MRP Firms with market power will have a MRP Curve below a competitive firm