-The preceding table gives monthly production information for Peter's Peanuts, a firm in a perfectly competitive industry. Initially the market price of peanuts is $2.00 per pound. If the market price of peanuts fall to $1 per pound and a worker costs $800 per month, how many workers will Peter employ to maximize his profit?

Question

Quizplus · Accepted Answer

Peter will employ two workers to maximize his profit. At a market price of $1 per pound, Peter's marginal revenue is also $1 per pound. His marginal cost is $800 per worker divided by the number of pounds produced by that worker. The table shows that the third worker produces 400 pounds of peanuts, so the marginal cost of the third worker is $800/400 = $2 per pound. Since the marginal cost of the third worker is greater than the marginal revenue, Peter will not hire the third worker.

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