ECN 201 Principles of Microeconomics

Fall 2021

Week 13 – Practice Problems

1. A. The table below shows the production function for a small firm. Fill in the MPL and VMPL columns,
assuming P (output) = $10. Recall that MPL is the additional output produced by the additional worker,
while VMPL = P x MPL.

Price per
Units of
# workers unit of MPL VMPL
output
output
0 0 $10 -- 0

1 11 10

2 23 10

3 36 10

4 45 10

5 52 10

6 55 10

B. Suppose the market wage rate is $100. Explain how many workers should this firm hire.

C. Suppose the market wage rate falls to $80. Explain how many workers should this firm hire at this lower
wage.

2. Suppose the marginal cost of hiring an additional unit of labor is $10 and the value of the marginal
product from hiring this additional unit of labor is $12. To maximize profit, this firm should hire:
a. more labor.
b. less labor.
 Explain your answer.

3. The equilibrium wage rate is $18. A perfectly competitive firm sells widgets for $8. Suppose the
marginal product of the sixth unit of labor is three widgets and the marginal product of the ninth unit of
labor is two widgets. This firm should hire:
A. fewer than six units of labor.
B. more than nine units of labor.
C. more than six but fewer than nine units of labor.
D. six units of labor.
E. nine units of labor.

Explain your answer

4. Suppose new technologies, like more efficient computers and the internet, increase the productivity of
high skill workers like computer programmers, and substitute low skill workers, like bank tellers.
a. Explain how this type of technology impacts the VMPL of computer programmers, their labor
demand, and their wage.

b. Explain how this type of technology impacts the VMPL of bank tellers, their labor demand, and
their wage.
 c. Explain how the changes in the wages of high versus the low skill workers you described in parts
a. and b. impact overall income inequality.

5. In a paragraph with several sentences, describe the topic you have chosen for your income inequality
paper (see assignment on D2L for further details) and how you will analyze it. You will need to cite at
least 3 sources for your paper. List at least one here along with any related questions you might have.