The following table provides information for Harry's Hammers, a firm that hires labor competitively and sells hammers for $50 each in a competitive price-taker market.
If the market wage rate is $225 per week, how many units of labor would a profit-maximizing firm employ?
A) 4
B) 5
C) 6
D) 7

Question

The following table provides information for Harry's Hammers, a firm that hires labor competitively and sells hammers for $50 each in a competitive price-taker market.
 If the market wage rate is $225 per week, how many units of labor would a profit-maximizing firm employ?
A) 4 
B) 5 
C) 6 
D) 7

Quizplus · Accepted Answer

To determine the profit-maximizing level of labor, we need to calculate the marginal product of labor (MPL) and the marginal revenue product of labor (MRP) for each unit of labor.

||L|Q|MP|MRP|Wage|
|---|---|---|---|---|---|
|Total| | | | | $225|
|1|1| 7 |7 | $350 | $225|
|2|2|13 |6 | $300 | $225|
|3|3|18 |5 | $250 | $225|
|4|4|22 |4 | $200 | $225|
|5|5|25 |3 | $150 | $225|
|6|6|27 |2 | $100 | $225|
|7|7| 28|1 | $50 | $225|

As we see from the table, MRP initially decreases with each additional unit of labor because of diminishing marginal returns. Eventually, it becomes negative, indicating that an additional worker would actually decrease profits.

The profit-maximizing level of labor is where MRP = Wage. This occurs when the firm employs 6 units of labor (choice C), where the MRP of the sixth worker is equal to the wage rate ($100 = $225).

The Following Table Provides Information for Harry's Hammers, a Firm