Question

In: Economics

Use the table below to answer the next two questions. The table below shows the relationship...

Use the table below to answer the next two questions. The table below shows the relationship between the number of workers hired and production. Wage is fixed at $49. How many workers should be hired to maximize profits if the product is sold at the price of $5 per unit?

2
3
4
5

Labor	Quantity of Product	Marginal Product of Labor	Wage
1	8	8	49
2	20	12	49
3	36	16	49
4	46	10	49
5	51	5	49

Using the above information, and suppose wage is the only cost to pay, what is the firm’s profit when it uses its optimal number of workers.

36
34
33
30

Expert Solution

Labor	Quantity	Marginal Product	Marginal Revenue Product	Wage
1	8	8	40	49
2	20	12	60	49
3	36	16	80	49
4	46	10	50	49
5	51	5	25	49

Marginal Revenue Product = Marginal Product x $5

A firm hires workers till marginal revenue product is equal to wage.

Reason

Marginal revenue product is the additional revenue generated by hiring additional worker so if marginal revenue product is greater than the wage that means additional revenue by hiring an additional worker is greater than the cost of hiring that worker which is profit for the firm. Hence the firm continues to hire till marginal revenue product is equal to the wage or at least greater than wage.

So from the above table, the firm will hire 4 workers because till 4 workers marginal revenue product is greater than the wage.

Hence option C is correct

Firm's profit at 4 workers will be equal to

Profit = Total Revenue - Total Cost

Total Revenue = Price x Quantity

Total Revenue = 5 x 46

Total Revenue = 230

Total Cost = Number of workers x wage

Total Cost = 4 x 49

Total Cost = 196

Profit = Total Revenue - Total Cost

Profit = 230 - 196

Profit = 34

Hence option B is correct

Rahul Sunny answered 2 years ago

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