The following table shows the number of bread loaves that can be produced per hour at various levels of labor use.The bakery is a perfectly competitive firm.
Table 16-2
$$\begin{array} { | c | c | }
\hline \text { Labor } & \text { Total output } \
\hline 1 & 5 \
\hline 2 & 16 \
\hline 3 & 30 \
\hline 4 & 40 \
\hline 5 & 45 \
\hline 6 & 48 \
\hline 7 & 49 \
\hline
\end{array}$$
-Refer to Table 16-2.If the price of bread is $2 per loaf and the wage rate is $20 per hour,how many workers will the profit maximizing firm hire?
A)3
B)4
C)5
D)6

Question

The following table shows the number of bread loaves that can be produced per hour at various levels of labor use.The bakery is a perfectly competitive firm.
Table 16-2
 $$\begin{array} { | c | c | } 
\hline \text { Labor } & \text { Total output } \
\hline 1 & 5 \
\hline 2 & 16 \
\hline 3 & 30 \
\hline 4 & 40 \
\hline 5 & 45 \
\hline 6 & 48 \
\hline 7 & 49 \
\hline
\end{array}$$
-Refer to Table 16-2.If the price of bread is $2 per loaf and the wage rate is $20 per hour,how many workers will the profit maximizing firm hire?
A)3
B)4
C)5
D)6

Quizplus · Accepted Answer

To determine the profit-maximizing level of labor use, the firm should hire up to the point where the marginal revenue product (MRP) of labor equals the wage rate. The MRP is equal to the additional revenue generated from hiring one more worker.

To calculate the MRP for each level of labor use, the change in total output from adding one more worker is calculated:

$$\begin{array} { | c | c | c | c | } 
\hline \text { Labor } & \text { Total output } & \text{Change in output} & \text{MRP} \
\hline 1 & 5 & & \
\hline 2 & 16 & 11 & \
\hline 3 & 30 & 14 & \
\hline 4 & 40 & 10 & \
\hline 5 & 45 & 5 & \
\hline 6 & 48 & 3 & \
\hline 7 & 49 & 1 & \
\hline
\end{array}$$

The MRP is calculated by multiplying the change in output by the price of bread:

$$\begin{array} { | c | c | c | c | } 
\hline \text { Labor } & \text { Total output } & \text{Change in output} & \text{MRP} \
\hline 1 & 5 & & \
\hline 2 & 16 & 11 & 22 \
\hline 3 & 30 & 14 & 28 \
\hline 4 & 40 & 10 & 20 \
\hline 5 & 45 & 5 & 10 \
\hline 6 & 48 & 3 & 6 \
\hline 7 & 49 & 1 & 2 \
\hline
\end{array}$$

The firm will hire up to the point where MRP equals the wage rate of $20 per hour. At four workers, the MRP is $20, so this would be the profit-maximizing level of labor use. At this level, the total output is 40 loaves of bread per hour, and the total revenue is $80. The total cost of hiring four workers is $80 (4 workers x $20 per hour), so the profit is zero. If the firm hired more workers, the MRP would be less than the wage rate, so they would not add to the firm's profits.

The Following Table Shows the Number of Bread Loaves That