Question

Acme Widget, Inc., has the following production function and sells its output at a price of $5 per widget. The nominal wage is $30.

Workers Widgets MPN
1 8 8
2 15 7
3 21 6
4 26 5
5 30 4
6 33 3

With the nominal wage fixed at $30, the price of widgets doubles from $5 each to $10 each. What happens to Acme's labor demand and production?
A. The labor demand curve does not shift, and the number of workers hired does not change, so production does not change.
B. The labor demand curve shifts to the right, the number of workers hired increases to 6, and production rises.
C. The labor demand curve does not shift, but the number of workers hired increases to 6, and production rises.
D. The labor demand curve shifts to the right, the number of workers hired increases by more than 6, and production rises.
E. The labor demand curve does not shift, but the number of workers hired increases by more than 6, and production rises.

Answer 1

The labor demand curve shifts right with the price increase of widgets from $5 to $10, leading to an increase in workers hired to 6 and a rise in production, as each worker's output generates more revenue for the firm.

Step-by-step explanation:

When the price of widgets doubles from $5 to $10, the revenue generated by each worker's output increases correspondingly. This change affects labor demand because workers become more valuable to the firm since they produce more revenue per widget. Assuming the nominal wage is fixed at $30 and the production function doesn't change, the labor demand curve will shift to the right. This means the firm is willing to hire more workers at the same wage because each worker is now generating more revenue.

The correct answer is that: The labor demand curve shifts to the right, the number of workers hired increases to 6, and production rises. In our scenario, profit-maximizing employers will now pay up to the increased revenue each worker can generate.

Moreover, based on the new demand for labor, the firm will hire up to the point where the marginal product of labor times the price of widgets equals the nominal wage. This is known as the marginal revenue product of labor. As the price of widgets increases, so does the marginal revenue product, thereby justifying an increase in the quantity of labor demanded.