Answer to Question #153966 in Microeconomics for Sadat

Question

The following table provides the information of a perfectly competitive firm (5)

Number of Labors Number of Candy Bars Produced

Per day

1 80

2 150

3 200

4 240

5 250

6 230

7 200

Using the information in the table, find the number of candies the firm should produce if the wage rate is $20 and candy bars are sold for $0.50. (Assume there is no fixed cost.)

Answer 1

ANSWER

The perfectly competitive firm can make the highest profit at quantity of candy bars (denoted by q) that provides the following equation

$MC(q)=P$ where P is the market price and MC is a marginal cost.

To compute the MC we should use the following formula:

$MC(q)=w*IMPL(q)$ , where IMPL(q) is a inverse marginal product of labour (change in the amount of workers (or hours worked) with respect to increase in the amount of units produced by one).

Hence, if the price equal to 0.5 and wage rate equal to 20, then the IMPL (q) should be equal to $1/40$. Hence, L equal to 4 and change in the units produced is equal to 40 (from 200 to 240).

Conclusion: a firm should produce 240 candy bars to maximize its profit.