Scenario: Victoria Corp. makes running shoes by employing a robotics technology that requires at most a few, but highly skilled, workers for monitoring and maintenance of the robots. Each robot costs $240,000. The table below shows the marginal product of capital (MPK) per month when the firm employs one worker versus when it employs two workers. Each pair of Victoria shoes sells for $150.

-Refer to the scenario above.If the firm decides to employ two workers,and the wage for each worker is $40,000 per month,the firm's maximum profit is ________.

Question

Scenario: Victoria Corp. makes running shoes by employing a robotics technology that requires at most a few, but highly skilled, workers for monitoring and maintenance of the robots. Each robot costs $240,000. The table below shows the marginal product of capital (MPK) per month when the firm employs one worker versus when it employs two workers. Each pair of Victoria shoes sells for $150.
 
-Refer to the scenario above.If the firm decides to employ two workers,and the wage for each worker is $40,000 per month,the firm's maximum profit is ________.

Quizplus · Accepted Answer

To maximize profits, the firm should produce where marginal revenue equals marginal cost. In this case, the marginal revenue of producing an additional pair of shoes is $150. The marginal cost of producing an additional pair of shoes is the cost of the robots divided by their marginal product of capital.

When the firm employs one worker, the MPK is 200 pairs of shoes per month. Therefore, the marginal cost of producing an additional pair of shoes is $240,000/200 = $1,200.

When the firm employs two workers, the MPK increases to 240 pairs of shoes per month. Therefore, the marginal cost of producing an additional pair of shoes is $240,000/240 = $1,000.

Since the marginal cost of producing an additional pair of shoes is lower with two workers, the firm should employ two workers. The total cost of the two workers would be $80,000 per month ($40,000 per worker). The total revenue from selling 480 pairs of shoes (240 pairs per worker) would be $72,000 ($150 per pair). Therefore, the profit would be $72,000 - $80,000 = -$8,000.

Since the profit is negative, the firm should not produce any shoes. Therefore, the maximum profit is $0. However, if the firm were to produce shoes, the profit would be highest when producing with one worker. The profit with one worker would be $150 * 200 - $40,000 = $10,000.