Scenario 14.1
A worker in Firm A earns an income of $5,000 per month. He has been offered a job in Firm B where he will be paid a salary of $7,000 per month.
-Suppose the output of a firm hiring workers in a competitive labor market increases by three units when an additional worker is hired. This firm will hire more laborers if the market price of its product is $4 and the wage rate is $9. [Hint: Marginal revenue product of a resource is equal to the product of marginal product of the resource and the marginal revenue of the firm.]

Question

Quizplus · Accepted Answer

The worker will have a higher opportunity cost of working at Firm A since he can earn a higher salary at Firm B, so he will likely choose to switch jobs. In addition, the firm in the labor market described will hire more laborers if the market price of its product is greater than or equal to the wage rate divided by the marginal product of labor (which is 3 in this scenario), so with a market price of $4 and a wage rate of $9, the firm will hire more laborers. Therefore, both statements in the scenario are true.

Scenario 14.1 A Worker in Firm a Earns an Income of $5,000