If the hourly wage is $50 and the price of output is $25,then,in the short run,
A) the firm should add workers if they add 1/2 or more units to output.
B) the firm should add workers if they add 2 or more units to output.
C) the firm should hire two workers.
D) the firm should reduce employment until the wage falls to $25.

Question

Quizplus · Accepted Answer

In the short run, the firm's decision to add workers depends on the marginal product of labor (MPL), i.e., the additional output produced by each additional worker. The MPL is given by the slope of the production function. If MPL is greater than the ratio of wage to price (i.e., MPL > w/p), then the firm should hire more workers to increase its profit. In this case, MPL = 2 units per hour, which is greater than the ratio of wage to price (= 50/25 = 2). Therefore, the firm should add workers if they add 2 or more units to output. Adding 1 worker increases output by 2 units, and this is enough to cover the cost of his wage ($50), which is less than the revenue generated by the additional output ($25 x 2 = $50). Therefore, the firm should add workers until MPL falls to the ratio of wage to price, at which point the firm would be indifferent between hiring or not. Since there is no information on the shape of the production function, we cannot determine the optimal number of workers or whether there are diminishing returns to labor.

If the Hourly Wage Is $50 and the Price of Output