A wheat farmer sells wheat in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is $10, the farmer employs five workers and the marginal product of the fifth worker is 10 bushels. What would you advise this farmer to do?
A) Do nothing because the wage rate and the marginal product of the last worker hired are equal.
B) Reduce employment because the wage paid is less than the marginal revenue product.
C) Increase employment because the wage paid is less than the marginal revenue product.
D) Reduce the product price so that the wage and marginal revenue product will be equal.

Question

Quizplus · Accepted Answer

The marginal revenue product (MRP) is the additional revenue generated by employing one more unit of a factor, in this case, labor. It is calculated as the marginal product (MP) of the labor times the market price of the product. Here, the MP of the fifth worker is 10 bushels, and the market price of wheat is $2 per bushel, making the MRP = 10 bushels * $2/bushel = $20. Since the wage rate is $10, which is less than the MRP of $20, the farmer can increase profit by hiring more workers.

A Wheat Farmer Sells Wheat in a Perfectly Competitive Market