Multiple Choice
When economists say that the demand for labor is a derived demand, they mean that it is:
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15. Markets for the Factors of Production
Demand for Labor in Perfect Competition
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A cupcake shop in a competitive market sells its cupcakes for \$20 per dozen. It hires its laborers at a wage of \$10 per hour. To maximize its profit, the firm should hire laborers until the marginal product of labor is
A
15 dozens per hour
B
10 dozens per hour
C
2 dozens per hour
D
½ dozen per hour
Verified step by step guidance1
Understand the concept of Marginal Product of Labor (MPL), which is the additional output produced by hiring one more unit of labor.
Recognize that in a competitive market, firms maximize profit by hiring labor until the value of the marginal product of labor (VMPL) equals the wage rate.
Calculate the Value of the Marginal Product of Labor (VMPL) using the formula: VMPL = MPL × Price of the product. Here, the price of cupcakes is \$20 per dozen.
Set the VMPL equal to the wage rate to find the MPL that maximizes profit. The equation is: MPL × \$20 = \$10.
Solve the equation for MPL: MPL = \$10 / \$20, which simplifies to MPL = 0.5 dozens per hour.
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