Consider a firm that is competitive in both the product and the resource market. The firm incurs a marginal cost of $5. If the marginal product of an additional worker is 20 units, what is the maximum wage that should be offered to the worker?
What will be an ideal response?
In a perfectly competitive market, the market price of a good that a firm charges is equal to the marginal cost of producing the good. Therefore, the market price of the good equals $5. Because a worker should be paid a wage up to his value of marginal product, the maximum wage that should be offered to the worker is 20 × 5 = $100.
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