Diane's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. She is a profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $10. The marginal productivity of the last worker that Diane hired was 2 tires per hour. What is the maximum hourly wage that Diane was willing to pay the last worker hired?
A) $5
B) $10
C) $20
D) There is insufficient information to answer this question.

Question

Quizplus · Accepted Answer

The maximum hourly wage Diane is willing to pay is equal to the value of the marginal product of labor, which is the marginal productivity of the worker (2 tires per hour) multiplied by the marginal cost of installing a tire ($10), resulting in $20 per hour.

Diane's Auto World Installs Tires on Automobiles, Light Trucks, and Sport