 Question :The John Lamb Company, a profit-maximizing firm producing widgets, is in a perfectly
competitive widget market. Assume John Lamb employs a fixed number of employees and
rents a machine for a variable number of hours from a perfectly competitive market.
(a) Assume that the popularity of widgets declines, decreasing the demand for widgets. What
will happen to each of the following marginal product curve for machine-hours and marginal
revenue product curve for machine-hours. Explain.
 (b) John Lamb is employing the cost-minimizing combination of inputs. The marginal
product of labor is 28 widgets per worker hour and the wage rate is $14 per hour. The
marginal product of the machine is 60 widgets per machine-hour. What is the hourly rental
price of a machine?
 (c) Assume that the table above gives the short-run marginal revenue product of labor per day
for John Lamb.
John Lamb is currently selling its product at the market price of $5.
(i) Calculate the marginal (physical) product of the third worker.
(ii) Define the law of diminishing marginal returns and explain why it occurs.
(iii) Diminishing marginal returns first occur with the hiring of which worker for the firm?
(iv) What is the highest daily wage that the firm is willing to pay to hire the fifth worker?
(v) What will happen to the demand for labor if the market price of the product increases?
Explain.
d
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