Winnie's Car Wash is a perfectly competitive firm. The table above shows Winnie's total product schedule. If the price of a car wash is $4 and the wage rate is $50 per day, how many workers should Winnie employ to maximise his profit?

Question

Quizplus · Accepted Answer

To maximize profit, Winnie should employ workers up to the point where the marginal revenue product (MRP) equals the marginal cost (MC) of labor. MRP is calculated as the marginal product (MP) of labor times the price of the service. Without the table, we can't calculate exact numbers, but the principle is that Winnie should hire workers until the additional revenue generated by the last worker hired is equal to the cost of hiring that worker ($50). Since we know the price of a car wash is $4, we look for the point where the additional car washes generated by hiring an additional worker, when multiplied by $4, is just about equal to or less than $50, without exceeding it. This typically involves calculating the additional car washes (marginal product) each worker provides and stopping at the point where hiring another worker would not generate at least $50 in additional revenue.

Winnie's Car Wash Is a Perfectly Competitive Firm