Suppose a firm is a price searcher in the product market and hires labor in a perfectly competitive labor market.If the wage rate is $20, the marginal product of the last worker hired is 5, and the firm is hiring the profit-maximizing amount of labor, then the marginal revenue from the last unit of output must be
A)$1
B)$1.50
C)$4
D)$5
E)$20

Question

Quizplus · Accepted Answer

In order to determine the marginal revenue (MR) from the last unit of output, we need to use the profit maximization rule for a price searcher firm:

Marginal Revenue (MR) = Marginal Cost (MC)

We also know that this firm is hiring labor in a perfectly competitive labor market, so the wage rate (w) is equal to the marginal cost of labor (MC). Therefore, we can rewrite the profit maximization rule as:

MR = w x MPL

Where MPL is the marginal product of labor. We are given that MPL = 5 and w = $20, so:

MR = $20 x 5 = $100

Therefore, the marginal revenue from the last unit of output must be $100. However, we are only asked for the marginal revenue from the last worker hired (not the last unit of output), so we need to divide this by the MPL:

MR from last worker = MR / MPL = $100 / 5 = $20 - $20 = $4

Therefore, the answer is C, $4.

Suppose a Firm Is a Price Searcher in the Product