The frangle industry is a monopoly, with a demand curve 100 - p, where p is the price of frangles. It takes one unit of labor and no other inputs to produce a frangle. The Frangle-Makers Guild is a strong union. The guild sets a wage and prevents anyone from working for less than that wage. The frangle monopoly must pay that wage but can hire as much labor as it chooses to. If the guild chooses a wage so as to maximize the total earnings (wage times number of units of labor hired) of frangle makers, then

Question

Quizplus · Accepted Answer

To maximize total earnings, the guild would choose a wage rate that corresponds to the point where the marginal product of labor (MPL) equals the price of frangles. The MPL of labor is 1, since it takes one unit of labor to produce a frangle. So at the point where MPL = price, the wage rate must also equal the price of frangles to maximize total earnings. Using the demand curve, we can find the optimal price and wage rate:

100 - p = w 
p = 100 - w

Substituting the first equation into the second, we get:

p = 100 - (100 - p) 
p = $50

Therefore, the optimal price of frangles is $50, and the guild will set the wage rate equal to that amount to maximize total earnings. Therefore, the answer is E.

The Frangle Industry Is a Monopoly, with a Demand Curve