Question

A shoe factory in Athens sells shoes for $50 per pair. The last worker hired produced an additional 8 pairs of shoes, and was paid $100 per hour.

(a) Should the rm hire more workers, re some workers, or keep the same number of workers? Explain why.

(b) Suppose one of the factory's machines breaks and cannot be replaced. Comment on how this will aect the productivity of each worker, and how this would aect the hiring decision of the factory. (Consider how the loss of the machine will aect the marginal product of labor.)

Answer 1

a) Marginal revenue = $50
The new worker is hired at $100 and this has resulted in 8 additional units production.
This implies that: Marginal Cost = 100/8 = $12.5
Since the marginal revenue > marginal cost the firm can make more profit with more number of workers. Hence the firm should hire more workers.

b) If one of the machines breaks downs in the factory the marginal product of the labor comes down. When the factory was functioning perfectly there was an optimal use of the machines available. But when one of them breaks down, over-crowding takes place. This is to say that the workers won't be able to use the machines in hand since there are more workers in the factory than actually needed [for the given new number of machines]. Thus this leads to mismanagement of the resources [machines] and hence the marginal product of labor reduces.