Handout 12 Producer Theory – Factor and Input Markets This handout contains exercises of - Factor and Input Markets Things you should know - How does a firm choose the amount of worker/capital it hires/rent? Exercises Question 1 (Numerical examples) In this industry, all firms operate using the same production function. All firms hire workers in the perfectly competitive labor market and sell goods in the perfectly competitive goods market. Suppose a representative firm has the production function exhibited in the following table: Quantity of Total Labor (L) Product (Q) 0 0 1 40 2 70 3 90 4 105 5 115 6 120 1. Suppose the current wage is $100 per worker and the price of goods is $10 per unit. How many workers should each firm hire? 2. Suppose there are less people willing to work, causing the wage to increase to $200, and as a result, each firm is now hiring 4 workers, what must have happened to the price of goods for such equilibrium? 3. Instead, suppose better technology doubles the output produced by any firms, it is expected that the demand for labor would [ increase / decrease ], causing the wage in the labor market to [ increase / decrease ]. Question 2 (Two factors of production) You are the owner of a manufacturing company using capital and labor to produce goods. Currently you are hiring 200 workers and renting 100 machines. Through competitive factor markets, the wage (price of labor) is $20 per worker and the rent (price of capital) is $10. The 200th worker brings 40 units of output to the production, while the 100th machine brings 30 units of output to the production. This good sells for $20 per unit in the perfectly competitive market. 1. State the optimal rules for the choice between hiring labor and renting capital. (Hint: Recall the bang-for-the-bucks) 2. Is the current levels of labor and capital the most profitable? If not, should you hire or fire workers? Should you rent more or less capital? Question 3 (Factors complementarity and substitutability) A car manufacturer uses assembly robots, which are complementary with robot technicians and substitutable with hand-made workers. An increase adoption of assembly robots used will: - [ increase / decrease ] demands for robot technicians. - [ increase / decrease ] demands for hand-made workers. In the aspects of marginal products, this increased adoption of assembly robots used will: - [ increase / decrease ] marginal products of assembly robots. - [ increase / decrease ] marginal products of robot technicians. 1