The bauble industry is competitive with free entry. There is a fixed-coefficient technology. One unit of labor and one unit of plastic are required for each bauble. Workers in the bauble industry must all belong to the Bauble-Makers Union. The union sets the wage that will be paid to all bauble makers. The price of plastic is 10 dollars per unit and the demand function for baubles is 1,000 - 10p. Long-run equilibrium requires that the price of baubles equals the cost of production. The wage per unit of labor that maximizes total revenue of workers is

Question

Quizplus · Accepted Answer

In long-run equilibrium, price equals the cost of production. The cost of production per bauble is the sum of the wage and the cost of plastic. The demand function is 1,000 - 10p, so revenue is maximized when marginal revenue equals marginal cost. Solving for the wage that maximizes total revenue, given the demand function and cost constraints, results in a wage of 45 dollars.

The Bauble Industry Is Competitive with Free Entry