The table below shows a competitive firm's short-run production function.Labor is the firm's only variable input,and market price for the firm's product is $2 per unit. If the wage rate is $200,the firm should

Question

The table below shows a competitive firm's short-run production function.Labor is the firm's only variable input,and market price for the firm's product is $2 per unit.  If the wage rate is $200,the firm should

Quizplus · Accepted Answer

To determine whether the firm should continue producing or shut down, we need to compare the wage rate to the marginal revenue product (MRP) and average revenue product (ARP) of labor.

The MRP can be calculated as the additional revenue generated by adding one more unit of labor:

MRP = ΔTR / ΔL

Where ΔTR is the change in total revenue and ΔL is the change in labor. From the table, we can see that the MRP of the first unit of labor is $245 ($490 - $245), and the MRP of the second unit of labor is $200 ($540 - $340).

Since the wage rate is $200, the firm should produce as long as the ARP is greater than or equal to the wage rate. ARP is calculated as total revenue divided by the amount of labor employed:

ARP = TR / L

Using the table, we can calculate the ARP for each level of labor:

- ARP(1) = $490 / 1 = $490
- ARP(2) = $540 / 2 = $270
- ARP(3) = $570 / 3 = $190
- ARP(4) = $580 / 4 = $145
- ARP(5) = $575 / 5 = $115

Therefore, the firm should produce as long as it is using at least 2 units of labor, since the ARP of 2 units or more is greater than the wage rate of $200. Choice D correctly states that the firm should produce because the ARP is $245, which is greater than the wage rate.

The Table Below Shows a Competitive Firm's Short-Run Production Function