The diagram below shows the MRP curve for a firm producing copper plumbing pipe.The factor of production being considered here is hours of labour.
FIGURE 13-1
-Refer to Figure 13-1.Suppose this profit-maximizing firm is facing MRP1 and a wage rate of $12 per hour.Now suppose there is,simultaneously,an increase in demand for copper plumbing pipe (such that MRP shifts to MRP2),and an increase in the wage rate to $16 per hour.The firm should
A)employ 20 more units of labour.
B)employ 40 more units of labour.
C)employ the same number of units of labour.
D)employ 40 fewer units of labour
E)employ 20 fewer units of labour.

Question

The diagram below shows the MRP curve for a firm producing copper plumbing pipe.The factor of production being considered here is hours of labour.
  FIGURE 13-1
-Refer to Figure 13-1.Suppose this profit-maximizing firm is facing MRP1 and a wage rate of $12 per hour.Now suppose there is,simultaneously,an increase in demand for copper plumbing pipe (such that MRP shifts to MRP2),and an increase in the wage rate to $16 per hour.The firm should
A)employ 20 more units of labour. 
B)employ 40 more units of labour. 
C)employ the same number of units of labour. 
D)employ 40 fewer units of labour 
E)employ 20 fewer units of labour.

Quizplus · Accepted Answer

When MRP shifts from MRP1 to MRP2, the marginal product of labor increases at each level of employment (Q). This means that for any given wage rate, the additional output per worker is greater. Therefore, the profit maximizing firm would want to hire additional workers. The increase in wage rate from $12 to $16 per hour would increase the cost of hiring each worker, but the increase in output from the increase in MRP would more than offset the increase in costs.

Specifically, at Q=40, MRP1 intersects the wage rate of $12/hr. At this point, the firm hires 200 workers. When MRP shifts to MRP2, the MRP curve intersects the $12 wage rate at Q=60. At this point, the additional output per worker is higher than it was at Q=40. Therefore, the firm would want to hire additional workers, until MRP2 intersects the new wage rate of $16/hr. This occurs at Q=220.

The firm would want to hire 220-200=20 more units of labor.

The Diagram Below Shows the MRP Curve for a Firm