Question

Number of Workers	Pizzas per hour	VMP
1	10
2	15
3	18
4	20

a. Cooks in this market earn an average wage of $15 per hour. At this wage, how many workers will Penny hire?

b. What wage would Penny pay if she was going to hire all 4 workers?

c. Why will the wage rate go down as Penny hires more workers?

Answer 1

In a perfectly competitive labour market, firms hire at a point where the value of marginal product = wage

( This is applicable where VMP decreases with an increase in labour .)

But here VMP is increasing with increasing labour quantity ( while MC is fixed at 15$ ). This means we have not reached the point where MVP starts to decline.

Therefore, it will be beneficial to keep on hiring up to L = 4

B.

If penny hires all 4 workers he can afford to give a wage = VMP at L = 4 which is 20$

C.

As she will hire more labourers, MVP will start to decline and hence what she can afford to pay them will also start to decline.