Scenario 14.1:
You are the manager of a firm producing green chalk. The marginal product of labor is:
MP L = 24L -1/2
Suppose that the firm is a competitor in the green chalk market. The price of green chalk is $1 per unit. Further suppose that the firm is a competitor in the labor market. The wage rate is $12.00 per hour.
-Given the information in Scenario 14.1, how much labor will be hired to maximize profit?
A) 1/16
B) 1/2
C) 1
D) 4

Question

Scenario 14.1:
You are the manager of a firm producing green chalk. The marginal product of labor is:
MP L = 24L -1/2 
Suppose that the firm is a competitor in the green chalk market. The price of green chalk is $1 per unit. Further suppose that the firm is a competitor in the labor market. The wage rate is $12.00 per hour.
-Given the information in Scenario 14.1, how much labor will be hired to maximize profit?
A) 1/16
B) 1/2
C) 1
D) 4

Quizplus · Accepted Answer

To maximize profit, the firm will hire labor until the value of the marginal product of labor (VMPL) equals the wage rate. The VMPL is the marginal product of labor (MPL) times the price of the product. Given MPL = 24L^(-1/2) and the price of green chalk is $1, VMPL = $24L^(-1/2). Setting VMPL equal to the wage rate of $12 and solving for L gives L = (24/12)^2 = 4.

Scenario 14.1: You Are the Manager of a Firm Producing Green Chalk