When a competitive firm hired nine workers, its profits were $100. When it hired 10 workers, its output was went from 9 to 11 units. Each unit of output sold for $10 while the wage of each worker was $12. What is the firm's new profit level?

Question

Quizplus · Accepted Answer

First, we need to determine the firm's initial profit per unit of output:

Profit per unit = Price per unit - Wage per worker
Profit per unit = $10 - $12
Profit per unit = -$2

This shows that the firm is making a loss of $2 per unit of output when it hires 9 workers.

Next, we can use the information about the change in output when the firm hires 10 workers to calculate the new profit level:

Change in output = New output - Old output
Change in output = 11 - 9
Change in output = 2

With one additional worker, the firm is now producing 2 more units of output. We can calculate the additional cost of the extra worker:

Additional cost = Wage per worker x Number of additional workers
Additional cost = $12 x 1
Additional cost = $12

The additional revenue from the 2 extra units of output is:

Additional revenue = Price per unit x Number of additional units
Additional revenue = $10 x 2
Additional revenue = $20

Therefore, the new profit level is:

New profit = Old profit + Additional revenue - Additional cost
New profit = $100 - $20 + $12
New profit = $108

Thus, the correct answer is (C): $108.

When a Competitive Firm Hired Nine Workers, Its Profits Were