Find the MPN for each level of employment and fall in table

Find the MPN for each level of employment and fall in table above. The IDEA Company pays W = 340/hour and the price of each light bulb = $7. Calculate the real wage? Using the real wage, w, what is the decision rule IDEA will use in determining the profit maximizing level of employment, N? Explain the decision rule intuitively: What is the profit maximizing level of employment? Now suppose the price of light bulbs falls to P = $5. What is the new profit maximizing level of employment?

Solution

a.) Your table calculation is correct.

b.)Real wage (w)=Nominal wage/price

w=40/7=5.71=6

c.) Real wage should be equal to MPN for profit maximization.If w<MPN, firm should hire more workers and increase employment.

d.)MPN=w=6 at number of workers equal to 3.

e.) P=5 $

Real wage now(w) =W/P

w=40/5=8

Now w=8

MPN is 10 at 2 units of labour

MPN is 6 at 3 units units of labour

So profit maximizing level of employment will be either 2 or 3.