Question

The owner and manager of a duplicating service near a major university, is contemplating keeping his shop open in the evening until midnight. In order to do so, he would have to hire additional workers. He estimates that the additional workers would generate the following total output (where each unit of output refers to 100 pages duplicated). If the price of each worker hired must be paid $100 and the price of each unit of output duplicated is $6, how many workers should he hire? (10 points)

Workers Hired   0              1              2              3              4              5              6

Total Product     0              21           43           60           76           91            102                                                                        

To work this problem you will need to calculate the MRP values and then compare them to the MRC.

Answer 1

In economic theory, a producer employs an additional input until the additional revenue generated is more than the additional cost incurred by the producer. For this case, we will use the comparison of the Marginal Revenue Product, MRP( the additional revenue generated when one more worker hired) and Marginal Revenue Cost, MRC( the additional cost incurred when one more worker hired)

Now the producer will hire the labour as long as MRP>MRC and stop recruiting at MRP=MRC since it will yield the producer profit maximisation output.

whereas MRP= Revenue change/ additional input

and MRC= Change in total resource cost/ additional input

Now we will see workers hired and corresponding MRP and MRC

Cost of each unit of labour is $100 and the Output price is $6

Worker Hired	Total Cost	Change in Total cost(MRC)	Product	Total revenue	Change in revenue(MRP)
0	0	0	0	0	0
1	100	100	21	126	126
2	200	100	43	258	132
3	300	100	60	360	102
4	400	100	76	456	96
5	500	100	91	546	90
6	600	100	102	612	66

Note: here additional unit is one every time, therefore, the change is the cost is implicitly MRC and change in revenue is implicitly MRP

The theory established and data analysed show that employer should hire up to 3 workers because until here MRP>MRC and after that MRC>MRP and violates the profit maximisation condition.

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