Profit-Maximizing Behavior in Factor Markets Practice Test

A perfectly competitive firm is a price taker in both the output and labor markets. The market wage is $W = $60 per worker per day. The firm’s marginal revenue product (MRP) schedule for labor is shown in the table. Based on the firm’s MRP and wage, how many workers should the firm hire to maximize profit?

MRP schedule (per day):

• 1st worker: $120
• 2nd worker: $100
• 3rd worker: $80
• 4th worker: $60
• 5th worker: $40

A perfectly competitive firm is a price taker in both the output and labor markets. The market wage is $W = $110 per worker per day. The firm’s marginal revenue product (MRP) schedule for labor is shown below. Based on the firm’s MRP and wage, at what employment level is profit maximized?

MRP schedule (per day):

• 1st worker: $160
• 2nd worker: $140
• 3rd worker: $120
• 4th worker: $100
• 5th worker: $80