Answer to Question #235412 in Microeconomics for anika

Question

let’s assume that Patty buys a new high-tech pizza oven that allows her workers to become twice  as productive as before. That is, the first worker now produces 18 pizzas per hour instead of 9, and so  on.  

e) Calculate the new MPL and the new VMPL at the original price of $2 per pizza using the new  information above.  

f) Using answer e) determine how Patty’s hiring decision responds to this increase in the productivity  of her workforce when the wage rate is $10, i.e., will she hire more workers or less workers than  before or not change the number of workers? (use a diagram if needed). 

Answer 1

(e) Table showing the old and new MP_L and VMP_L is given below.

VMP_{L =} 2 × MP_L

The condition of equilibrium for determining the number of workers is VMP_L = w.

When VMPL exceeds the wage rate, hiring more employees is the best option since the output created by an additional labor unit is more than the cost of hiring him. If VMPL is less than the pay rate, it is also advantageous to lower the number of employees.

According to this rationale, Patty should recruit two workers based on the initial productivity of the workers and a salary rate of $10. This is because if she hires three people, her salary will be higher than the VMP.

She should recruit four people if productivity doubles and the salary rate remains the same.

The number of laborers is measured on the horizontal axis, while the wage rate is measured on the vertical axis in the picture above. The yellow line shows the pay rate. The VMPL curve has moved to the right from VMPL1 to VMPL2 due to increased labor productivity. The number of employees employed has risen from two to four.