Question

A soybean farmer sells soybeans in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of soybeans is $6 a bushel, the wage rate is $30, the farmer employs eight workers and the marginal product of the eighth worker is 7 bushels. What would you advise this farmer to do?
a. Reduce employment because the wage paid is less than the marginal revenue product.
b. Reduce the product price so that the wage and marginal revenue product will be equal.
c. Do nothing because the wage rate and the marginal product of the last worker hired are equal.
d. Increase employment because the wage paid is less than the marginal revenue product.

Answer 1

Answer:

The correct answer is option D.

Explanation:

The market for soybeans is perfectly competitive and the market for labor is perfectly competitive as well.  

The price of soybeans is fixed at $6/bushel.  

The wage rate is $30.  

A farmer hires eight workers.  

The marginal product of the eighth worker is 7 bushels.  

The marginal revenue product of the eighth worker is

= $MP\times Price$

= $7\times6$

=$42

We see that the wage rate is lower than the marginal revenue product. So the farmer should increase employment till the wage rate and marginal revenue product become equal.