Use the information given in the table below to answer the following question(s). Assume the firm hires labor competitively and sells its product in a competitive price-taker market at a price of $2 per unit.
Table 12-7

Refer to Table 12-7. If the market wage rate is $5 per day, how many workers should the firm employ if it wants to maximize profits?
A) three
B) four
C) five
D) six

Question

Use the information given in the table below to answer the following question(s). Assume the firm hires labor competitively and sells its product in a competitive price-taker market at a price of $2 per unit.
Table 12-7

Refer to Table 12-7. If the market wage rate is $5 per day, how many workers should the firm employ if it wants to maximize profits?
A) three 
B) four 
C) five 
D) six

Quizplus · Accepted Answer

The firm should employ the number of workers at which the marginal revenue product (MRP) of labor equals the wage rate (W). In this case, the MRP of the fourth worker is $10 (2 x 5), which is equal to the wage rate of $5. Therefore, the firm should hire four workers to maximize profits. If it hired fewer than four, the MRP of the last worker hired would be greater than the wage rate, meaning that profits could be increased by hiring more workers. If it hired more than four, the MRP of the last worker hired would be less than the wage rate, meaning that profits could be increased by firing the unproductive worker.

Use the Information Given in the Table Below to Answer