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?

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?

Quizplus · Accepted Answer

To find the profit-maximizing level of labor, we need to calculate the marginal revenue product (MRP) of labor.

MRP = change in total revenue / change in labor

From the table, we can see that the total revenue of Harry's Hammers increases as it hires more labor up to 6 units. When the 7th unit is hired, however, the total revenue decreases, indicating that the MRP of labor has diminished.

So, the profit-maximizing level of labor is 6 units, as this is where the MRP of labor is equal to the wage rate of $225. Any additional labor would result in a decrease in profits for the firm. Thus, the answer is C) 6.

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