Leadbelly Co. sells pencils in a perfectly competitive product market and hires workers in a perfectly competitive labor market. Assume that the market wage rate for workers is $150 per day.

a. What rule should Leadbelly follow to hire the profit-maximizing amount of labor?

b. At the profit-maximizing level of output, the marginal product of the last worker hired is 30 boxes

of pencils per day. Calculate the price of a box of pencils.

c. Draw a diagram of the labor market for pencil workers (as in Figure 4 of this chapter) next to a diagram of the labor supply and demand for Leadbelly Co. (as in Figure 3). Label the equilibrium wage and quantity of labor for both the market and the firm. How are these diagrams related?

d. Suppose some pencil workers switch to jobs in the growing computer industry. On the side-by-side diagrams from part (c), show how this change affects the equilibrium wage and quantity of labor for both the pencil market and for Leadbelly. How does this change affect the marginal product of labor at Leadbelly?

Answer