High Tech, Inc. produces plastic chairs that sell for $10 each. The following table provides information about how many plastic chairs can be produced per hour. For simplicity, assume that labor is the only input. How many workers will be hired if the hourly wage for workers is $70?

Question

High Tech, Inc. produces plastic chairs that sell for $10 each. The following table provides information about how many plastic chairs can be produced per hour.  For simplicity, assume that labor is the only input. How many workers will be hired if the hourly wage for workers is $70?

Quizplus · Accepted Answer

Since the marginal product is diminishing when more workers are hired, the value of the marginal product is also diminishing. While the first worker adds 10 chairs per hour (10 - 0), the second worker only adds 8 chairs per hours (18-10) and so forth. The marginal value of marginal product is therefore: $100 for the first worker (10 × $10), $80 for the second worker (8 × $10), $60 for the third worker (6 × $10), $40 for the fourth worker (4 × $10), and $20 for the fifth and final worker (2 × $10). So the firm will hire 2 workers. At that level, the value of marginal product is $80 per hour whereas the cost is only $70 per worker. Hiring additional workers will reduce profit as the value of the marginal product for the third worker is only $60 per hour.