A farmer who has fixed amounts of land and capital finds that total product is 24 for the first worker hired, 32 when two workers are hired, 37 when three are hired, and 40 when four are hired. The farmer's product sells for $3 per unit, and the wage rate is $13 per worker. How many workers should the farmer hire?
A) 1
B) 2
C) 3
D) 4

Question

Quizplus · Accepted Answer

The marginal product of labor (MPL) can be calculated as the change in total product (TP) divided by the change in labor (L). With the given data, MPL values are:

MPL of first worker = (32 - 24)/(1-0) = 8
MPL of second worker = (37 -32)/(2-1) = 5
MPL of third worker = (40 - 37)/(3-2) = 3
MPL of fourth worker = (40 - 37)/(4-3) = 3

To maximize profits, the farmer should hire workers until the MPL equals the wage rate. In this case, the farmer should hire three workers, since the MPL of the third worker is equal to the wage rate of $13 per worker. Hiring the fourth worker would result in an MPL less than the wage rate, resulting in diminishing returns to labor and lower profits.

A Farmer Who Has Fixed Amounts of Land and Capital