Production data for Joe's Pizza Parlor are as follows. For simplicity assume that labor is the only input. Each pizza sells for $5. How many workers will Joe hire if he must pay each one $45 a day?

Question

Production data for Joe's Pizza Parlor are as follows. For simplicity assume that labor is the only input. Each pizza sells for $5.  How many workers will Joe hire if he must pay each one $45 a day?

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 pizzas per hour (10 - 0), the second worker only adds 8 pizzas per hours (18-10) and so forth. The marginal value of marginal product is therefore: $50 for the first worker (10 × $5), $40 for the second worker (8 × $5), $30 for the third worker (6 × $5), $20 for the fourth worker (6 × $5), and $10 for the fifth and final worker (2 × $5). So Joe hires 1 worker as the value of marginal product is higher than $45 for only one worker. Any other number of workers reduces profits, as the added cost per hour would exceed the added value from additional pizza.

Production Data for Joe's Pizza Parlor Are as Follows