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Chapter 1Figure It Out 13.1

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Victoria’s Tours, Inc. is a travel company that offers guided tours of nearby mountain biking trails. Its marginal revenue product of labor is given by MRPL = 1000 – 40L, where L is the number of tour-guide-weeks it hires (a tour-guide-week is the amount of work done by one tour guide working one full-time week) and MRPL is measured in dollars per tour-guide-week. The going market wage in the city where Victoria’s Tours is located is $600 per tour-guide-week.

What is the optimal amount of labor for Victoria’s Tours to hire?

Victoria’s Tours should hire workers.

When Victoria’s Tours hires the optimal amount of labor, the marginal revenue product of labor (1,000 – 40L) will equal the wage (600). So, 1,000 – 40L = 600, or L = 10. For further review see section “Demand in a Perfectly Competitive Factor Market”.
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      At and above what market wage would Victoria’s Tours not want to hire anyone?

      Victoria’s Tours will not want to hire anyone at any wage higher than $ per week.

      The firm will hire labor until the marginal revenue product of labor equals the existing wage. The marginal revenue product of labor is 1,000 – 40L; the wage is w, so Victoria’s Tours hires until 1,000 – 40L = w. If Victoria’s Tours doesn’t want to hire any workers, then L = 0. Substitute 0 for L to get 1,000 – 40(0) = w, or w = 1,000. So, at a wage of $1,000 per week or more, Victoria’s Tours will not want to hire anyone. For further review see section “Demand in a Perfectly Competitive Factor Market”.
      GLS 2e FIO 13.1 Part B
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          What is the most labor Victoria’s Tours would ever hire given its current marginal revenue product?

          Victoria’s Tours would never hire more than workers.

          Victoria’s Tours will hire until the marginal revenue product of labor (1,000 – 40l) equals the wage, w. It will hire the greatest number of workers when they are free. At a wage of zero, Victoria’s Tours will hire until 1,000 – 40l = 0, or l = 25. Hiring more than 25 workers, even if those workers are unpaid, will reduce revenue. Therefore, Victoria’s Tours would hire, at most, 25 workers. For further review see section “Demand in a Perfectly Competitive Factor Market”.
          GLS 2e FIO 13.1 Part B
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