Table 18-B
Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day.
-Refer to Table 18-B. Assuming MadeFromScratch is a competitive, profit-maximizing firm, how many workers will the firm hire?

Question

Table 18-B
Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. 
-Refer to Table 18-B. Assuming MadeFromScratch is a competitive, profit-maximizing firm, how many workers will the firm hire?

Quizplus · Accepted Answer

To determine the optimal level of labor needed, we need to calculate the marginal product of labor (MPL) and the marginal revenue product of labor (MRP). MPL is calculated by dividing the change in total output by the change in labor input. MRP is calculated by multiplying the MPL by the price of the output (in this case, cupcakes).

In Table 18-B, we can see that when the firm hires the first worker, output increases from 0 to 12 cupcakes, so MPL for the first worker is 12. MRP for the first worker is $3/cupcake * 12 cupcakes = $36/day.

When the firm hires the second worker, output increases from 12 to 20 cupcakes, so MPL for the second worker is 8. MRP for the second worker is $3/cupcake * 8 cupcakes = $24/day.

When the firm hires the third worker, output increases from 20 to 24 cupcakes, so MPL for the third worker is 4. MRP for the third worker is $3/cupcake * 4 cupcakes = $12/day.

When the firm hires the fourth worker, output increases from 24 to 26 cupcakes, so MPL for the fourth worker is 2. MRP for the fourth worker is $3/cupcake * 2 cupcakes = $6/day.

As we can see, each additional worker contributes less and less to output, and therefore to revenue. Because the firm is profit-maximizing, it will stop hiring labor when the cost of hiring an additional worker (the wage of $325) exceeds the additional revenue that worker would bring in (MRP). This happens at the third worker, where MRP = $12/day, which is less than the wage of $325/day. Therefore, the firm will hire 3 workers.

Table 18-B Consider the Following Daily Production Data for MadeFromScratch, Inc. MadeFromScratch