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In: Economics

You are given the following information for a T-shirt manufacturing firm: Price per T-shirt is $5....

You are given the following information for a T-shirt manufacturing firm: Price per T-shirt is $5. With Total Labor Units as 1 employee, the firm’s Total Product (TP) is 20 shirts/day; with 2 employees, TP=50 shirts/day; with 3 employees, TP=75 shirts/day; with 4 employees, TP=95 shirts/day; and with 5 employees, TP=110 shirts/day. With zero employees, it produces nothing. Therefore, the maximum payment to labor per day that this profit-maximizing T-shirt manufacturer would be willing to make when it wants to hire the third employee is ___ per day. [Hint: Construct a table with given data for Total Labor Units (i.e. no. of employees) and Total Product. Then calculate MPL and MRPL corresponding to each level of no. of employees, and answer the question. MRPL = MPL x PX]

Solutions

Expert Solution

The profit maximizing firm will ready to make a payment equals to marginal revenue product or value of marginal product at particular quantity of labor it want to hire.

Formula for marginal product = Change in TP / change in Labor

Marginal revenue product of labor(MRPL) = MP x Price

Price L TP MP MRPL
5 1 20 20 100
5 2 50 30 150
5 3 75 25 125
5 4 95 20 100
5 5 110 15 75

So here to hire 3rd unit of labor, the MRPL is 125. It means that firm is ready to pay 125 to hire 3rd unit of labor.

Therefore, the maximum payment to labor per day that this profit-maximizing T-shirt manufacturer would be willing to make when it wants to hire the third employee is 125​​​​ per day.

Rahul Sunny answered 2 years ago
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