Question

Table 14.10 shows levels of employment (Labor), the marginal product at each of those levels, and the price at which the firm can sell output in the perfectly competitive market where it operates.

Labor	Marginal product of Labor	Price of the product
1	10	\(4
2	8	\)4
3	7	\(4
4	5	\)4
5	3	\(4
6	1	\)4

1. What is the value of the marginal product at each level of labor?
2. If the firm operates in a perfectly competitive labor market where the going market wage is $12, what is the firm’s profit maximizing level of employment?

Short answer

1. Marginal product is the marginal product of labor multiplied by the firm's output price.
2. The firm's profit maximizing level of employment is 5 labors.

Step-by-step solution

Part (a) Step 1: Introduction

The worth of labor's marginal productivity drives a company's labor force. This is the worth of the marginal product for a company operating in a perfectly competitive output market.

Part (a) Step 2: Explanation

For a company operating in a perfectly competitive output market, the value of the marginal product is the marginal product of labor multiplied by the company's output price. The value of the marginal product at each level of labor is given below:

Labor	Marginal product of labor	Price of the product	Value of marginal product
1	10	$4	$40
2	8	$4	$32
3	7	$4	$28
4	5	$4	$20
5	3	$4	$12
6	1	$4	$4

Part (b) Step 2: Introduction

The worth of labor's marginal productivity drives a company's labor force. This is the worth of the marginal product for a company operating in a perfectly competitive output market.

Part (b) Step 2: Explanation

A profit-maximizing company will employ people up until the point where the market wage matches the marginal product in a perfectly competitive labor market where the continuing wage is $12. When the labor is 5, the market wage equals the marginal product since the marginal product is $12 at that point.