Gino's Pizza shop hires cooks in a competitive market.The raw material required to make each pizza costs $5.Daily output at Gino's Pizza varies with the number of workers hired,as shown in the table below: $\begin{array}{cc}
\text { Number of workers } & \text { Pizzas/ Day } \
0 & 0 \
1 & 16 \
2 & 36 \
3 & 54 \
4 & 70 \
5 & 84 \
6 & 96
\end{array}$
If the pizzas sell for $10/pie,and the competitive market wage is $80 per day,Gino will hire ____ workers and produce ____ pizzas per day.

Question

Quizplus · Accepted Answer

To maximize profit, Gino's Pizza shop should produce the quantity of pizzas at which the marginal revenue equals the marginal cost.

From the table, we see that the marginal product (i.e. increase in output) of each additional worker decreases at higher levels of employment. Therefore, the marginal cost of labor increases as more workers are hired.

At 4 workers, the marginal revenue of producing an additional pizza is $10, while the marginal cost (including raw materials) is $6.67. This means that each additional pizza produced will add $3.33 of profit to the firm.

At 5 workers, the marginal revenue of producing an additional pizza is still $10, but the marginal cost increases to $8.33. This means that producing an additional pizza will only add $1.67 of profit to the firm.

Therefore, the profit-maximizing level of employment is 4 workers, which will produce 70 pizzas per day.

Gino's Pizza Shop Hires Cooks in a Competitive Market If the Pizzas Sell for $10/pie,and the Competitive Market Wage