Figure 1 Labour (number of workers)

$ \begin{array}{cccc}
\text { Labour (number of } & \text { Output } & \text { Marginal Product } & \text { Value of MPL } \
\text { workers) } & \text {per hour } & \text { of Labour (MPL) } \
\hline0 & 0 \
1 & 5 \
2 & 9 \
3 & 12 \
4 & 14 \
5 & 15
\end{array} $
-Refer to Figure 1. If this profit-maximizing firm sells its output in a competitive market for €3 per unit and hires labour in a competitive market for €8/hour, then this firm should hire

Question

Figure 1 Labour (number of workers)

$ \begin{array}{cccc}
 \text { Labour (number of } & \text {  Output } & \text { Marginal Product } & \text { Value of MPL } \
 \text { workers) } & \text {per hour  } & \text {  of Labour (MPL) } \
\hline0 & 0 \ 
1 & 5 \ 
2 & 9 \ 
3 & 12 \ 
4 & 14 \
 5 & 15
\end{array} $
-Refer to Figure 1. If this profit-maximizing firm sells its output in a competitive market for €3 per unit and hires labour in a competitive market for €8/hour, then this firm should hire

Quizplus · Accepted Answer

To determine how many workers the firm should hire, we need to look at the value of the marginal product of labour (MPL). The MPL is the additional output that is produced by hiring one more unit of labour. It is calculated as the change in output divided by the change in labour.

For example, the MPL of the first worker is:

MPL = (5 - 0) / (1 - 0) = 5

This means that the first worker is adding 5 units of output per hour. Similarly, we can calculate the MPL for each additional worker:

MPL of second worker = (9 - 5) / (2 - 1) = 4
MPL of third worker = (12 - 9) / (3 - 2) = 3
MPL of fourth worker = (14 - 12) / (4 - 3) = 2
MPL of fifth worker = (15 - 14) / (5 - 4) = 1

The value of MPL is the amount of extra output that is produced by hiring one more unit of labour, multiplied by the price of output in the market. In this case, the price of output is €3 per unit.

For example, the value of the MPL of the first worker is:

Value of MPL = MPL x Price of output = 5 x €3 = €15

Similarly, we can calculate the value of MPL for each additional worker:

Value of MPL of second worker = 4 x €3 = €12
Value of MPL of third worker = 3 x €3 = €9
Value of MPL of fourth worker = 2 x €3 = €6
Value of MPL of fifth worker = 1 x €3 = €3

The firm should hire workers up to the point where the value of MPL equals the wage rate, which is €8 per hour. This is because if the wage rate is higher than the value of MPL, then hiring an additional worker would result in a loss for the firm.

From the table, we can see that the value of MPL is highest for the first worker, but the wage rate is higher than the value of MPL. Therefore, the firm should not hire the first worker.

The value of MPL is also higher than the wage rate for the second worker, but hiring the second worker would result in a lower value of MPL than the first worker. Therefore, the firm should not hire the second worker.

However, the value of MPL is equal to the wage rate for the third worker. This means that hiring the third worker would add exactly €8 worth of value to the firm's output, which is exactly equal to the cost of hiring the worker. Therefore, the firm should hire the third worker.

Hiring additional workers beyond the third worker would result in a lower value of MPL than the wage rate, so the firm should not hire any more workers. Therefore, the best choice for the firm is to hire three workers.

Figure 1 Labour (Number of Workers) -Refer to Figure 1