Solutions to Problems

Chapter 14

1a. The wage rate is $6 an hour. The wage rate adjusts to make the quantity of labour demanded equal to the
quantity supplied (see figure 1).

1b. The number of pickers hired is 400 a day. At a wage rate of $6 an hour, 400 pickers a day are hired (see
figure 1).

1c. The income received is $2,400 an hour.

Income = wage rate multiplied by the number of pickers
= $6x400
= $2,400 an hour

Figure 1 Figure 2
Cherry pickers – Problem 1 Cherry pickers – Problem 2
Wage rate (dollars per hour)

Wage rate (dollars per hour)

10 10

S S
8 8

6 6 Economic rent
Economic rent
4 4 D

D
2 Opportunity cost 2 Opportunity cost

0 0
300 400 500 300 400 500
Quantity (pickers per day) Quantity (pickers per day)

3a. Marginal product of labour is the increase in total product that results from hiring one additional student. The
marginal product of labour schedule for Wanda’s fish shop is shown in table 1 and the marginal product of
labour curve (MP) derived from this schedule is shown in figure 3.

Wanda’s fish shop – Problems 3, 5 & 7

45
25
Dollars per hour per student

40
35 20
30
25 15
AP
20
10
15
10 MP 5 MRP
5 MRP/
0 0
0 2 4 6 8 0 2 4 6 8
Number of students Number of students
figure 3

3b. Marginal revenue product of labour is the increase in total revenue that results from hiring one additional
student. The marginal revenue product schedule for Wanda’s fish shop is shown in table 1 and the marginal
revenue product curve (MRP) derived from this schedule is shown in figure 3.

3c. Wanda’s demand for labour curve is the same as the downward sloping section of the marginal revenue
product curve MRP in figure 3.
3d. Wanda hires 7 students.

Wanda hires the number of students that makes the marginal revenue product equals to the wage rate of $7.50
an hour. When Wanda increases the number of students from 6 to 7, marginal product is 15 kilograms of fish
an hour, which Wanda sells for 50 cents a kilogram. Marginal revenue product is $7.50—the same as the
wage rate (see table 1).

Table 1  Problems 3&7

Fish sells for $0.50 per kilogram

Number of Q AP MP ARP MRP

students (Kgs per hour) (Q/L) (dQ/dL) $(PxAP) $(PxMP)

1 20 20.00 10.00
30 15.00
2 50 25.00 12.50
40 20.00
3 90 30.00 15.00
30 15.00
4 120 30.00 15.00
25 12.50
5 145 29.00 14.50
20 10.00
6 165 27.50 13.75
15 7.50
7 180 25.71 12.86
10 5.00
8 190 23.75 11.88

5a. Marginal product does not change (see table 3).

5b. Marginal revenue product decreases.

The new marginal revenue product schedule for Wanda’s fish shop is shown in table 3 and the marginal
revenue product curve (MRP/) derived from this schedule is shown in figure 3.

5c. Wanda's demand for labour decreases, and her demand for labour curve shifts leftward from MRP to MRP / in
figure 3. Wanda is willing to pay the students their marginal revenue product, and the fall in the price of fish
has lowered their marginal revenue product.

5d. Wanda will employ 5 students.

At the wage rate of $7.50, the number of students Wanda hires decreases as the demand for labour curve
shifts leftward. The fifth student adds $8.33 to revenue and will be employed. The sixth student adds $6.67 to
revenue, less than his wage and will not be employed (see table 3).

Table 3  Problem 5

The wage rate is $7.50 Fish sells for $0.50 Fish sells for $0.3333
per kilogram per kilogram
Number of Q MP MRP MP MRP
students (Kgs per hour) (dQ/dL) $(PxMP) (dQ/dL) $(PxMP)

1 20
30 15.00 30 10.00
2 50
40 20.00 40 13.33
3 90
30 15.00 30 10.00
4 120
25 12.50 25 8.33
5 145
20 10.00 20 6.67
6 165
15 7.50 15 5.00
7 180
 10 5.00 10 3.33
8 190

7a. Marginal revenue product does not change because there has been no change in the price of fish or the
marginal product of labour (see table 1).

7b. Wanda's demand for labour remains the same because marginal revenue product has not changed.

7c. Wanda will hire fewer students. At the wage rate of $10 an hour, Wanda hires the number of students that
makes marginal revenue product equal to $10 an hour. Wanda now hires 6 students—down from 7. The
marginal product that results when Wanda hires the sixth student is 20 kilograms of fish an hour, and Wanda
sells this fish for 50 cents a kilogram. Marginal revenue product of the sixth student is $10 an hour (see table
1).

9. Wanda maximizes her profit when marginal revenue product equals the wage rate and when marginal revenue
equals marginal cost.

When the wage rate is $7.50 an hour, Wanda hires 7 students.

Marginal revenue product = marginal product x price

= 15 x $0.50
= $7.50 an hour = wage rate.

Marginal revenue = price

= 50 cents.

Marginal cost = Wage rate  marginal product

= $7.50  15
= 50 cents = marginal revenue.

So when Wanda hires 7 students, marginal revenue equals marginal cost and profit is maximized (see table 5.

Table 5  Problem 9

Fish sells for $0.50 per kilogram Wage rate is $7.50 per hour

L Q MR TVC MC MRP
(students) (Kgs per hour) (price) (LxW) (dTVC/dQ) $(PxMP)
1 20 7.50
2 50 0.50 15.00 0.25 15.00
0.50 0.19 20.00
3 90 22.50
0.50 0.25 15.00
4 120 30.00
0.50 0.30 12.50
5 145 37.50
0.50 0.38 10.00
6 165 45.00
0.50 0.50 7.50
7 180 52.50
0.50 0.75 5.00
8 190 60.00

11. Venus installs two production lines.

The cost of the first production line is $1 million. The net present value is $1,097,052 so Venus buys the
production line.

The cost of the second production line is $1 million. The net present value is $1,041,270 so Venus buys the
production line.

The cost of the third production line is $1 million. The net present value is $985,488 so Venus does not buy
the production line.
Table 7  Problem 11

Interest rate 5%

Net Present Cost Present Value of Present Value of Present Value of

Value marginal revenue year 1 income year 2 income
product

590,000/1.05 = 590,000/1.052 =
Plant 1 97,052 1,000,000 1,097,052 561,905 535,147
560,000/1.05 = 560,000/1.052 =
Plant 2 41,270 1,000,000 1,041,270 533,333 507,936
530,000/1.05 = 530,000/1.052
Plant 3 -14,512 1,000,000 985,488 504,762 =480,725

13. To answer this problem, we need to know the interest rate and the price that Greg expects next year. If he
expects the price to rise by a bigger percentage than the interest rate, he pumps none and waits for the
higher price. If he expects the price to rise by a smaller percentage than the interest rate, he pumps it all
now. If he expects the price to rise by a percentage equal to the interest rate, he doesn't mind how much
he pumps.

14. Income of $2,400 a day is divided between opportunity cost and economic rent. Economic rent is the
area above the supply curve below the wage rate (see figure 1).