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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

The nation of Ectenia has 20 competitive apple orchards, all of which sell apples at the world price of $2 per apple. The following equations describe the production function and the marginal product of labor in each orchard:

  Q = 100LL2

  MPL = 100 − 2L,

  where Q is the number of apples produced in a day, L is the number of workers, and MPL is the marginal product of labor

a. What is each orchard’s labor demand as a function of the daily w age W? What is the market’s labor demand?

b. Ectenia has 200 workers who supply their labor inelastically. Solve for the wage W How many workers does each orchard hire? How much profit does each orchard owner make?

c. Calculate what happens to the income of workers and orchard owners if the world price doubles to $4 per apple.

d. Now suppose the price is back at $2 per apple, but a hurricane destroys half the orchards. Calculate how the hurricane affects the income of each worker and of each remaining orchard owner. What happens to the income of Ectenia as a whole?

Subpart (a):

To determine
Wage rate.

Explanation

Daily wage can be derived as follows.

Wage=VMP×PriceApple=(1002L)×2=2004L

Wage is 2004L .

Rearrange the wage equation in terms of labor L=500

Subpart (b):

To determine
Calculate wage rate, profit and income.

Subpart (c):

To determine
Calculate wage rate and income.

Subpart (d):

To determine
Calculate profit and income.

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