A firm in a perfectly competitive market hires labour by the hour. The marginal product of successive hours is 12, 10, 7, 5 and 4 units. At first the price of the good is Rs 8 and the wage is Rs 50 per hour. Then the price rises to Rs 10 and the wage rises to Rs 60. How many hours does the firm hire before and after these changes?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → 3 hours before and 3 hours after
A competitive firm hires one more hour while its value of marginal product (VMPL = price × MPL) is above the wage, and stops when VMPL falls below the wage.
Given:
MPL of successive hours: 12, 10, 7, 5, 4
Before: price Rs 8, wage Rs 50
After: price Rs 10, wage Rs 60
VMPL before = 96, 80, 56, 40, 32
The 3rd hour (56) is worth more than Rs 50; the 4th (40) is worth less. The firm hires 3 hours.
VMPL after = 120, 100, 70, 50, 40
The 3rd hour (70) is worth more than Rs 60; the 4th (50) is worth less. The firm still hires 3 hours.
NCERT (2026-27): “5.1.1 Market Equilibrium: Fixed Number of Firms Since we are dealing with a perfectly competitive firm, marginal revenue is equal to the price of the commodity and hence marginal revenue product of labour in this case is equal to the value of marginal product of labour (VMPL). As long as the VMPL is greater than the wage rate, the firm will earn more profit by hiring one more unit of labour, and if at any level of labour employment VMPL is less than the wage rate, the firm can increase her profit by reducing a unit of labour employed. Given the assumption of the law of diminishing marginal product, the fact that the firm always produces at w = VMPL implies that the demand curve for labour is downward sloping. …” |