Figure 1
$$\begin{array} { c c c c }
\begin{array} { c }
\text { Labour (number of } \
\text { workers) }
\end{array} & \begin{array} { c }
\text { Output } \
\text { per hour }
\end{array} & \begin{array} { c }
\text { Marginal Product } \
\text { of Labour (MPL) }
\end{array} & \text { Value of MPL } \
\hline 0 & 0 & \
1 & 5 & \
2 & 9 & \
3 & 12 & \
4 & 14 & \
5 & 15 &
\end{array}$$
-Refer to Figure 1. If this profit-maximising firm sells its output in a competitive market for R30 per unit and hires labour in a competitive market for R80/hour, then this firm should hire

Question

Figure 1
 $$\begin{array} { c c c c } 
\begin{array} { c } 
\text { Labour (number of } \
\text { workers) }
\end{array} & \begin{array} { c } 
\text { Output } \
\text { per hour }
\end{array} & \begin{array} { c } 
\text { Marginal Product } \
\text { of Labour (MPL) }
\end{array} & \text { Value of MPL } \
\hline 0 & 0 & \
1 & 5 & \
2 & 9 & \
3 & 12 & \
4 & 14 & \
5 & 15 &
\end{array}$$
-Refer to Figure 1. If this profit-maximising firm sells its output in a competitive market for R30 per unit and hires labour in a competitive market for R80/hour, then this firm should hire

Quizplus · Accepted Answer

To determine the optimal amount of workers, we need to look at the marginal product of labor (MPL) and the value of MPL.

MPL is the additional output produced by hiring an additional unit of labor. As we can see in the table, MPL increases initially but eventually decreases. This is due to the law of diminishing marginal returns, which states that as more units of a variable input (in this case, labor) are added to fixed inputs (such as capital and land), the marginal product of the variable input eventually decreases.

The value of MPL is the additional revenue gained from hiring an additional unit of labor. We can find the value of MPL by multiplying MPL by the price of output (given in the problem as R30 per unit). For example, when one worker is hired, MPL is 5 and the value of MPL is R150 (5 x R30).

To maximize profits, the firm should keep hiring workers until the value of MPL equals the wage rate (R80/hour). We can see from the table that the value of MPL equals R80 when three workers are hired. At this point, hiring an additional worker would cost R80 in wages but only bring in R75 in additional revenue (MPL is 3 when four workers are hired), so it would reduce profits.

Therefore, the firm should hire three workers to maximize profits.

Figure 1 -Refer to Figure 1