1 Suppose a single firm has for a particular type of labor t

1.     Suppose a single firm has for a particular type of labor the marginal-revenue-product schedule given in the following table.

Number of units of labor

MRP of labor

1

$15

2

14

3

13

4

12

5

11

6

10

7

9

8

8

a.     Assume there are 100 firms with the same marginal-revenue-product schedules for this particular type of labor. Compute the total or market demand for this labor by completing column 1 in the following table.

(1)

Quantity of labor demanded

(2)

Wage rate

(3)

Quantity of labor supplied

_____

$15

850

_____

14

800

_____

13

750

_____

12

700

_____

11

650

_____

10

600

_____

9

550

_____

8

500

b.     Using the supply schedule for labor given in columns 2 and 3,

(1)   what will be the equilibrium wage rate? $__________

(2)   what will be the total amount of labor hired in the market? ____________________________________

c.     The individual firm will

(1)   have a marginal labor cost of $__________.

(2)   employ __________ units of labor.

(3)   pay a wage of $__________.

f.      The imposition of a $12 minimum wage rate would change the total amount of labor hired in this market to _____________.

Number of units of labor	MRP of labor
1	$15
2	14
3	13
4	12
5	11
6	10
7	9
8	8

Solution

a. Assume there are 100 firms with the same marginal-revenue-product schedules for this particular type of labor. Compute the total or market demand for this labor by completing column 1 in the following table.

(1)

Quantity of labor demanded

(2)

Wage rate

(3)

Quantity of labor supplied

100 (=1*100)

$15

850

200 (=2*100)

14

800

300 (=3*100)

13

750

400 (=4*100)

12

700

500 (=5*100)

11

650

600 (=6*100)

10

600

700 (=7*100)

9

550

800 (=8*100)

8

500

For each wage rate the Quantity of labor demanded by each firm is such that wage = MRP. Hence the total quantity of labor demanded = 100*labor demanded by each firm.

b. Using the supply schedule for labor given in columns 2 and 3,

(1) what will be the equilibrium wage rate? $10 (when labor demand and supply are equal)

(2) what will be the total amount of labor hired in the market? 600

c. The individual firm will

(1) have a marginal labor cost of $60 (=6*10).

(2) employ 6 units of labor.

(3) pay a wage of $10.

f. The imposition of a $12 minimum wage rate would change the total amount of labor hired in this market to 400. (since the minimum wage is above the equilibrium wage it is binding and hence the amount of labor hired is given by the short side of the market, i.e. quantity of labor demanded)

(1) Quantity of labor demanded	(2) Wage rate	(3) Quantity of labor supplied
100 (=1*100)	$15	850
200 (=2*100)	14	800
300 (=3*100)	13	750
400 (=4*100)	12	700
500 (=5*100)	11	650
600 (=6*100)	10	600
700 (=7*100)	9	550
800 (=8*100)	8	500