Practice Questions 9

Question 1:

Data for a pumpkin farmer who can hire pumpkin pickers at $9 per day is provided below:

If the farmer maximizes profits, how many pumpkin pickers should he hire?

Question 2:

Two firms, A and B, operate in different but competitive industries. They both require labor with the same level of ability and skills and the labor market is also perfectly competitive. We know that the marginal product of labor for firm A is 8 and the marginal product of labor at firm B is 12. In addition, firm A faces a price of $6 per unit of output it produces. What should be the price at which firm B sells its product if both firms are maximizing their profits?

Question 3:

Suppose that East Ten is one of the shoemakers in the perfectly competitive market for shoes. The market demand for shoes is given by P = 100 - QD and the market supply is given by P = QS. The market for shoes is in long run equilibrium. East Ten employs workers in a perfectly competitive labor market which is characterized by the demand equation W = 1000 - 3L and the supply equation W = 2L. (Note: W stands for the weekly wage rate and L stands for the quantity of workers.) Identify the equilibrium wage rate and the number of workers employed by East Ten if its marginal product of labor is given by MPL = 30 - L.

Question 4:

Suppose that there is an automobile manufacturer and a catering firm in town which use labor with similar skill levels in production. Furthermore suppose that these two firms are the only employers in this particular labor market and they act as perfectly competitive firms in the labor market. The catering firm has the following labor demand equation: W = 100 - 5L while the automobile manufacturer has a labor demand curve given by W = 200 - 5L. If the residents supply labor according to the supply curve W = L + 10 , what is the equilibrium wage? What is the equilibrium quantity of workers employed? How many workers does each firm employ?

Multiple Choice Questions:

1. If both the output market and the labor market are perfectly competitive, then the firm should set ___________ to maximize profits.

a. P = W.MC
b. W = MP
c. MP = MC
d. W = MP.P
e. MP.P = ATC

2. Ed's Barber Shop is a small perfectly competitive firm that hires workers in a perfectly competitive labor market. Ed charges $10 per haircut, which is the prevailing market price. Marginal product of each worker is 2 haircuts per hour. What should Ed be paying as the hourly wage rate?

• $10
• $5
• $15
• $20
• $2

3. The labor supply curve shifts to the right when

• population increases.
• workers realize they would rather stay at home and watch TV.
• the wage rate increases.
• workers realize watching TV does not pay off.
• the number of firms increases.