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1. WidgetWorks operates in perfectly competitive markets. It hires an extra worker at $24 an hour....

1. WidgetWorks operates in perfectly competitive markets. It hires an extra worker at $24 an hour. Each hour he produces widgets, which will sell for $4 apiece. The firm concludes that this is the final worker it is willing to hire. How many widgets does this worker produce each hour?

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Answer #1

6 widgets per hour.

In a competitive market, the price is equal to the marginal cost the firm is incurring. That means if the wages of an extra worker is $24 and the price is only $4 then the worker should produce 6 widgets that will reduce the marginal cost to 4(24/6). If the cost is more the firm will face a loss and if the marginal cost is less the firm will hire more.

If the worker produces 6 widgets the marginal cost of an extra widget will be equal to its price of the widget that is $4. The firm will be at equilibrium.

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