Question

In: Economics

Maddie Factory has employed 20 workers whose average product is 1000kg’s of wheat. Each worker is given a wage of K2000 whilst the price of each bag of wheat is K20.

Maddie Factory has employed 20 workers whose average product is 1000kg’s of wheat. Each worker is given a wage of K2000 whilst the price of each bag of wheat is K20. The factory is considering hiring an additional worker who produces 2000 bags but demands a wage of K3000. Should the additional worker be hired? Show your full working.

Expert Solution

there are two scenarios

1. when the wage of the only last worker increased

the worker should be hired if the marginal revenue product of the worker is higher than or equal to the wage.

Marginal revenue product of a worker =marginal product of the worker*price =2000*20=40000

the marginal revenue product is higher than the wage demanded by the worker so it is profitable to hire and the firm should higher the worker.

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2. When the wage of all the worker is increased

The marginal profit should be positive to hire the next worker

Total product =average product * number of workers

the total product of 20 workers =1000*20=20000

total revenue =total product * price =20000*20=400000

total labor cost =wage * number of workers =2000*20=40000

profit =400000-40000=360000

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after the new workers

total labor cost =21*3000=63000

total product =old total product + marginal product of the employee=20000+2000=22000

total revenue =22000*20=440000

Profit =440000-63000

=377000

Marginal profit =new profit -old profit

=377000-360000

=K17000

the marginal profit is positive so the firm should hire 21st worker to increase its profit by K17000

Rahul Sunny answered 2 years ago

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