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toripollard8 toripollard8
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Posts: 359
A week ago

Question 1.

A firm's labor demand curve is also its marginal revenue product curve. For both the perfectly competitive firm and the output price maker, the labor demand curve slopes downwards. However, there is a difference in the reasons why the labor demand curve slopes downwards. What is this difference?



Question 2.

Table 17-5

Number of MechanicsOil Changes per DayMarginal ProductMarginal Revenue Product
1  6
212
317
421
524
626

Refer to Table 17-5. Oil Can Harry's, a new automobile service shop, is ready to start hiring. The table above shows the relationship between the number of mechanics the firm hires and the quantity of oil changes it produces.

a.

Suppose the price of an oil change is $20. Complete the table by filling in the values for
marginal product and marginal revenue product.

b.

Oil Can Harry's is an input price-taker. Suppose the wage paid to mechanics is $80 per day.
What is the profit-maximizing number of mechanics?

c.

Suppose the wage rate rises to $100 per day.

(i) What happens to the firm's demand curve for mechanics?

(ii) What happens to the profit-maximizing quantity of mechanics?

d.

Suppose the wage rate is $60 per day and the price of an oil change is now $15.

(i) What happens to the firm's demand curve for mechanics?

(ii) What happens to the profit-maximizing quantity of mechanics?

Textbook 

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Answer verified by a subject expert
qwer34qwer34
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Posts: 282
A week ago
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Answer 1

A perfectly competitive firm can sell all its output at a constant price. This means that its marginal revenue product falls as additional units of labor are hired only because of the law of diminishing returns. This law states that in the presence of a fixed factor, ultimately each additional unit of labor will be less productive than previous units. A firm with market power has to lower its selling price to sell more, so its marginal revenue product falls as additional units of labor are hired because of diminishing returns and a falling marginal revenue.

Answer 2

a.

Number of MechanicsOil Changes per DayMarginal ProductMarginal Revenue Product
1  66$120
2126  120
3175  100
4214    80
5243    60
6262    40

b.

The profit-maximizing number of mechanics is 4, where the marginal revenue product equals
the wage rate.

c.

(i) The demand curve does not change.  

(ii) The profit-maximizing quantity of mechanics falls to 3.

d.

(i) The demand curve shifts to the right.

(ii) The profit-maximizing quantity of mechanics increases to 4.

This verified answer contains over 960 words.
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