Chapter 71, Problem 1FRQ

a)

To determine

The market structure of the factor market in which the firm hires labor.

Explanation of Solution

The firm will employ labor in a market structure of a perfectly competitive labor market because the firm is a price-taker in the labor market and can hire workers as many as it needs or wants at the wage rate of $80 per day.

Economics Concept Introduction

Introduction: When different industries are classified according to the degree or nature of competition for the product, they come under the market structure such as perfect competition, monopoly, etc.

b)

To determine

The market structure of the product market in which the firm sells its goods.

Explanation of Solution

This will be a perfectly competitive product market where the firm sells its goods because all firms in this market relate to similar products. And, from the horizontal demand curve, it is clear that the firm is a price-taker in the product market. Therefore, the firm is ready to sell all of its quantity of output at the price of $5 according to the graph.

Economics Concept Introduction

Introduction: When different industries are classified according to the degree or nature of competition for the product, they come under the market structure such as perfect competition, monopoly, etc.

c)

To determine

The marginal factor cost definition and the marginal factor cost of labor for this firm.

Explanation of Solution

The marginal factor cost refers to the increase in total cost which is paid for by the factor of production by increasing one extra unit of factor. For example, in this case, labor is a factor of production, and an increase in one unit of labor will increase the total cost of the firm and this increase in cost is the marginal factor cost.

As the firm is paying a fixed wage of $80 per day to every worker by hiring workers as many as it wants, it means the marginal factor cost of the firm is $0.

Economics Concept Introduction

Introduction: When different industries are classified according to the degree or nature of competition for the product, they come under the market structure such as perfect competition, monopoly, etc.

d)

To determine

The last worker’s MRPL if the last hired worker produces an additional 20 units of output.

Explanation of Solution

If the last hired worker produces an additional 20 units of output for the firm, then the last worker’s MRPL would be:

MPL = 20

MR (price) = $5

  $\begin{array}{l}\text{MRPL = MPL}\times \text{MR}\hfill \\ \text{MRPL = 20}\times \text{\$5}\hfill \\ \text{ = \$100}\hfill \end{array}$

Therefore, the last worker’s MRPL would be $100 when the last hired worker produces an additional 20 units of output.

Economics Concept Introduction

Introduction: When different industries are classified according to the degree or nature of competition for the product then, they come under the market structure such as perfect competition, monopoly, etc.