-The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. The market price of peanuts is $2 per kilogram. A worker costs $1,200 per month. How many workers does Peter hire to maximise his profit?
A) Zero
B) Three
C) Four
D) One

Question

-The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. The market price of peanuts is $2 per kilogram. A worker costs $1,200 per month. How many workers does Peter hire to maximise his profit?
A) Zero 
B) Three 
C) Four 
D) One

Quizplus · Accepted Answer

To maximize profit in a perfectly competitive market, a firm will hire workers up to the point where the marginal revenue product (MRP) of labor equals the wage rate. MRP is calculated as the additional revenue generated by an additional worker, which can be found by multiplying the marginal product of labor (the additional output produced by an additional worker) by the market price of the product. Without the specific table data, we apply the principle that the firm will hire workers as long as the additional revenue from hiring an additional worker is at least equal to the cost of hiring that worker ($1,200 in this case). Since the market price of peanuts is $2 per kilogram, Peter would hire workers until the additional kilograms of peanuts produced by the last worker hired, when sold at $2 per kilogram, do not exceed $1,200. The correct answer implies that hiring three workers maximizes profit, suggesting that the marginal revenue product of the third worker is at least $1,200, and the marginal revenue product of a fourth worker would be less than $1,200, making three workers the profit-maximizing choice.

-The Preceding Table Gives Monthly Production Information for Peter's Peanuts