this simple example is useful for understanding the importance of whether wages are flexible or not

Fill in the table below and figure out how many workers I should hire to maximize profits. The current (given) nominal wage (W) = $80 and the given price of the output (P) = $10.

TABLE 1

N Y MPN MRPN Marginal Profit Total Profit 0 0 - - - 0

1 10 10 $100 20 20

2 25 15 $150 70 90

3 36 11 $110 30 120

4 45 9 $90 10 130

5 52 7 $70 -10 120

6 55 3 $30 -50 70 real profits = 130/10 = 13 real wages = 80/10 = 8 output = 45 Let's change prices to 12.5 - a 25% increase

0 0 MPN MRPN Marginal Profit Total Profit

1 10 10 $125 45 45

2 25 15 107.5 152.5 $187.5 3 36 11 $137.5 57.5 210

4 45 9 $112.5 32.5 242.5

5 52 7 $87.5 7.5 250

6 55 3 $37.5 -42.5 207.5 real profits = 250/12.5 = 20 real wages = 80/12.5 = 6.4 output = 52

Let's change wages to $100 - a 25% increase

0 0 MPN MRPN Marginal Profit Total Profit

1 10 10 $125 25 25

2 25 15 87.5 112.5 $187.5 3 36 11 $137.5 37.5 150

4 45 9 $112.5 12.5 162.5

5 52 7 $87.5 -12.5 150

6 55 3 $37.5 -62.5 87.5 real profits = 162.5/12.5 = 13 real wages = 100/12.5 = 8 output = 45