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Problem Set 6

# Problem Set 6 - Ramoo Econ 221 1a Labor 0 1 2 3 4 5 6 7...

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Ramoo Econ. 221 Key to Practice problem Set 6 (Chapter 10) 1a. Total Marginal Value of Labor Product Product MP L 0 0 0 \$0 1 7 7 7 units x \$2 = \$14 2 13 6 6 units x \$2 = \$12 3 18 5 \$10 4 22 4 \$8 5 25 3 \$6 MB to firm equals MC of hiring that labor unit 6 27 2 \$4 7 28 1 \$2 a. Let the output price = \$2 .Complete the table. b. Does the Total Product curve display increasing returns, diminishing returns or decreasing returns? Explain your answer. The total product curve or production function displays diminishing marginal returns throughout. c. Based on the data on marginal product, what is the shape of the marginal product curve (upward sloping, downward sloping, etc.)? The marginal product of labor (MP L ) curve slopes downwards. d. Does marginal product obey the Law of Diminishing Marginal Returns? Explain. Yes, the MP L curve obeys the law of diminishing marginal returns. Each additional unit of labor employed generates less and less output to the total product. e. Suppose the output price = \$2 and the wage rate = \$6. Using the table above, how many units of labor should the firm hire? Explain the rule you used to arrive at your answer. If output price = \$2 and wage = \$6, the optimal number of labor that the firm should employ is 5. The firm arrives at this decision by weighing its marginal benefit from employing the additional worker against the marginal cost of hiring that worker. The marginal benefit to the firm is the dollar amount that the worker contributes to the firm, i.e. it is the value of labor's marginal product. The marginal cost of hiring labor is simply the wage rate. 2. Text, Chapter 10, page 337, Question 5 A student looks at the data in Table 10-3 (See page 319) and draws this conclusion: “The marginal product of labor is increasing for the first 3 workers hired, then it declines for the next 3 workers. I guess each of the

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Problem Set 6 - Ramoo Econ 221 1a Labor 0 1 2 3 4 5 6 7...

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