Use the accompanying graph, which depicts Mighty Max's labor demand for his duffle-bag business, to answer the questions that follow.

-If the wage of the fifth worker is $20 and her value of the marginal product of labor is $5,the firm:
A) benefits by stopping at this level of labor.
B) is likely to fire the fifth worker.
C) asks this fifth worker to work overtime.
D) benefits by hiring more workers.
E) is likely to lose profit by hiring more workers.

Question

Use the accompanying graph, which depicts Mighty Max's labor demand for his duffle-bag business, to answer the questions that follow.
 
-If the wage of the fifth worker is $20 and her value of the marginal product of labor is $5,the firm:
A) benefits by stopping at this level of labor. 
B) is likely to fire the fifth worker. 
C) asks this fifth worker to work overtime. 
D) benefits by hiring more workers. 
E) is likely to lose profit by hiring more workers.

Quizplus · Accepted Answer

The value of the marginal product of labor (VMPL) is the additional revenue generated by hiring an additional worker, and it is equal to the marginal product of labor (MPL) multiplied by the price of the output (in this case, the price of duffle bags). In this case, the VMPL of the fifth worker is $5, which means that the firm is earning only $5 by hiring this worker. Since the wage paid to the worker is $20, the firm is incurring a loss of $15 by hiring this worker. Therefore, it is likely to fire the fifth worker to avoid further losses. Option B is the correct answer, as it implies that the firm will stop hiring more workers after the fifth worker. Option D and E are wrong because as soon as VMPL is less than the wage rate, it becomes economically irrational to hire more workers. Option A is wrong because, at the fifth worker, the firm is still making a profit, but hiring an additional worker will lead to losses. Option C is wrong because asking the fifth worker to work overtime will result in additional wage costs and not increase in output, leading to more losses.

Use the Accompanying Graph, Which Depicts Mighty Max's Labor Demand