Suppose that a firm sells a good for a perfectly competitive price of $5.The equilibrium wage rate is $10.The first worker it hires produces five units.Two workers produce a total of nine units.If it hires 2 workers,the value of marginal product for the second worker is:
A) $5.
B) $45.
C) $20.
D) $10.

Question

Quizplus · Accepted Answer

The value of marginal product (VMP) is calculated as the marginal product of labor (MPL) multiplied by the market price of the output (P).

In this case, the firm sells the good for $5, so the VMP of the first worker (who produces 5 units) is 5*5=$25.

When the firm hires a second worker, the total output increases from 5 units to 9 units, so the MPL of the second worker is 9-5=4 units.

Therefore, the VMP of the second worker is 4*$5=$20, which is option C.

Since the VMP of the second worker is higher than their wage rate of $10, it would be profitable for the firm to hire them.

Suppose That a Firm Sells a Good for a Perfectly