The Acme Company is a perfect competitor in its input markets and its output market. Its average product of labor is at its maximum and equals 30. The marginal revenue product of labor is $300. The price of its output:
A) is $0.10.
B) is $10.
C) is $9,000.
D) cannot be determined without more information.

Question

Quizplus · Accepted Answer

The optimal hiring rule for a perfectly competitive firm is to hire workers up to the point where the marginal revenue product of labor equals the wage rate. In this case, the marginal revenue product of labor is $300, so the firm should hire workers up to the point where the wage rate equals $300. However, we are not given the actual wage rate, so we cannot determine the exact price of the output. But since the average product of labor is at its maximum and equals 30, we know that the total product of labor is also at its maximum. Therefore, the price of output must be high enough to support a total revenue of at least $9,000 (30 x $300), which rules out options A and D. The only answer choice remaining is B, which gives a price of $10 per unit of output.

The Acme Company Is a Perfect Competitor in Its Input