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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A bakery operating in competitive markets sells its output for $20 per cake and hires labor at $10 per hour. To maximize profit, it should hire labor until the marginal product of labor is

a. 1/2 cake per hour.

b. 2 cakes per hour.

c. 10 cakes per hour.

d. 15 cakes per hour.

To determine
The competitive firm hiring labor.

Explanation

Option (a)

A competitive firm hires workers up to the point at which the value of the marginal product of labor (VMPL) equals the wage. When the marginal product of labor is half cake per hour and the price of cake being $20, then VMPL is equal to $10 (12×20) which equals the wage of $10. Thus, option ‘a’ is correct.

Option (b)

When MPL is 2 cakes per hour, VMPL is 40 (2×20) , which is greater than wage

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