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Finding the Efficient Level of Labour at a Bakery

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A medium-sized bakery has just opened in Slovakia. A loaf of bread is currently selling for 14 koruna (the Slovakian currency) over and above the cost of intermediate goods (floor, yeast, and so on). Assuming that labor is the only variable factor of production, the following table gives the production function for the bread.

0 0
1 15
2 30
3 42
4 52
5 60
6 66
7 70

a. Suppose the current wage rate in Slovakia is 119 koruna per hour. How many workers will the bakery employ?

b. Suppose the economy of Slovakia begins to grow, incomes rise, and the price of a loaf of bread is pushed up to 20 koruna. Assuming no increase in the price of labor, how many workers will the bakery hire?

c. An increase in the demand for labor pushes up wages to 125 koruna per hour. What impact will this increase in cost have on employment and output in the bakery at the 20-koruna price of bread?

d. If all firms behaved like our bakery, would the allocation of resources in Slovakia be efficient? Explain you answer.

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Solution Summary

This solution shows how to use Marginal Revenue Product to quickly and accurately calculate how many workers a bakery should hire to maximize its profit.

Solution Preview

See the attached file.

a) The Marginal Revenue Product (MRP) is the increase in revenue from hiring one more worker. The bakery will hire more workers as long as MRP is higher than the wage rate (the ...

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