1. A firm that is perfectly competitive in product and factor markets has the following pro¬duction function: L Q 0 0 1 7 2 15 3 22 4 28 5 33 6 37 7 40 8 42 9 43 a. Calc

PROBLEM SET #10 — Competitive Factor Markets

1. A firm that is perfectly competitive in product and factor markets has the following pro­duction function:

                                                       L                    Q

                                                       0                    0

                                                       1                    7

                                                       2                    15

                                                       3                    22

                                                       4                    28

                                                       5                    33

                                                       6                    37

                                                       7                    40

                                                       8                    42

                                                       9                    43

a. Calculate and graph the Marginal Revenue Product (MRP) for each unit of labor when the price of the firm’s out­put is $5. Why does the MRP curve have a negative slope?

b. How many units of labor will the firm hire if the wage for each worker is $35 and the prod­uct price is $5? Why?

c. If the wage falls to $25 per worker, how many workers will the firm now hire? Why?  Show these results in your graph in part a.

Suppose that the price of the firm’s product increases to $6 due to an increase in market demand for the firm’s product.

d. How many workers will the firm now hire if the wage for each worker is $30? Why? Show this result in a separate graph.