Kofi's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. He is a profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $15. The marginal productivity of the last worker that Kofi hired was 3 tires per hour. What is the maximum hourly wage that Kofi was willing to pay the last worker hired?

Question

Quizplus · Accepted Answer

The maximum hourly wage Kofi was willing to pay the last worker hired is equal to the marginal revenue product (MRP) of that worker. MRP is calculated as the marginal product of labor (MPL) times the price of the output (in this case, the marginal cost of installing a tire, since it's a competitive market). The MPL is 3 tires per hour, and the price per tire is $15, so the MRP = 3 tires/hour * $15/tire = $45. This means Kofi was willing to pay up to $45 per hour for the last worker.

Kofi's Auto World Installs Tires on Automobiles, Light Trucks, and Sport