Use the following table to answer the following questions:

-If the workers are paid $8 per hour,the price of the product is $4,and the fixed cost of the business is $20,then how many workers should the business employ?
A) three
B) four
C) five
D) six
E) seven

Question

Use the following table to answer the following questions:
 
-If the workers are paid $8 per hour,the price of the product is $4,and the fixed cost of the business is $20,then how many workers should the business employ?
A) three 
B) four 
C) five 
D) six 
E) seven

Quizplus · Accepted Answer

To determine the optimal amount of workers to employ, we need to find the level of production (in units) where the marginal cost is equal to the price of the product. From the table, we see that the marginal cost equals $8 per unit when there are four workers employed. At four workers, the total cost for producing two units is $44 (fixed cost of $20 plus variable cost of $24 for labor) and the revenue from selling two units is $8 x 2 x $4 = $64. This results in a profit of $20, which is equal to the fixed cost of the business.

Any level of production below this - with three or fewer workers - would result in a marginal cost that is greater than the price of the product, and thus a loss for the business. Any level of production above this - with five or more workers - would result in a marginal cost that is less than the price of the product, but also a diminishing profit margin, as the variable costs increase faster than the revenue from selling additional units. Therefore, the optimal choice is to employ five workers.

Use the Following Table to Answer the Following Questions