Figure 18-2.The figure shows a particular firm's value-of-marginal-product (VMP)curve.On the horizontal axis,L represents the number of workers.The time frame is daily.
-Refer to Figure 18-2.Suppose one point on the firm's production function is
(L = 3,Q = 180),where L = number of workers and Q = quantity of output.If the firm sells its output for $5 per unit,then

Question

Figure 18-2.The figure shows a particular firm's value-of-marginal-product (VMP)curve.On the horizontal axis,L represents the number of workers.The time frame is daily. 
-Refer to Figure 18-2.Suppose one point on the firm's production function is
(L = 3,Q = 180),where L = number of workers and Q = quantity of output.If the firm sells its output for $5 per unit,then

Quizplus · Accepted Answer

If the firm sells output for $5 per unit and one point on the production function is (L=3,Q=180), then we can calculate that the value of marginal product of the fourth worker is $240. Therefore, hiring the fourth worker will increase the total output by $240 and incur a cost of $160, leading to an increase in profit. Thus, a second point on the production function is (L=4,Q=216). This indicates that the production function exhibits the property of diminishing marginal product of labor. To maximize profit, the firm will continue to hire workers until the value of marginal product equals the wage rate. Therefore, if the firm pays workers $160 per day, it will maximize profit by hiring four workers.