Answered: 1. ABC firms is selling potatoes in a…

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: The Markets For The Factor Of Production

Section: Chapter Questions

Problem 7PA

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1. ABC firms is selling potatoes in a perfectly competitive product market and hires farmers in a perfectly competitive market. Assume that the market wage rate for farmers is $150 per day.

a. What rule should ABC follow to hire the profit-maximizing amount of labor?

b. At the profit-maximizing level of output, the marginal product of last worker hired is 30 pounds of potatoes per day. Calculate the price of a pound of potatoes.

c. Draw a diagram of the labor market for potatoes next to a diagram of the labor supply and demand for ABC. Label the equilibrium wage and quantity of labor for both the market and the firm. How are these diagrams related?

d. Suppose some farmers switch to jobs in the service industry. On the side-by-side diagrams from part (c ), show how this change affects the equilibrium wage and quantity of labor for both the potatoes market and for ABC. How does this change affect the

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