Clarke Mementos manufactures small figurines that they sell to retaile

Clarke Mementos manufactures small figurines that they sell to retailers around the country. Clarke sells the figurines for $5.00 each, a price the firm considers given. Clarke’s production function is given by the expression:

Q = 60L – 0.5L2,
where Q = number of figurines per day, and L = number of skilled workers per day. Based on this production function, the average and marginal products of labor are as follows:
AP = 60 – 0.5L MP = 60 – L

a. Write an expression for the firm’s marginal revenue product.
b. Clarke currently pays $150 per day (including fringe benefits) for each of its skilled workers. How many workers should the firm employ?
c. Clarke’s workers are highly skilled artisans with a great deal of job mobility. The firm’s managers fear that they must increase the workers’ total compensation to $200 per day to remain competitive. What impact would the wage increase have upon the firm’s employment?

ANSWER

a.
MRP = MR ∙ MP
P = MR since the firm regards price as given
P = 5
MRP = 5(60 – L) = 300 – 5L

b.
Equate MRP to wage:
300 – 5L = 150
5L = -150
L = 30

c.
At the new wage of 200,
300 – 5L = 200
-5L = -100
L = 20
Employment would fall from 30 to 20.