Clark starts a coffee shop and begins hiring employees. The first employee's marginal product of labor (MPL) is $128 an hour and the MPL for each employee beyond the first adds half of the previous employee's ($64 for the second, $32 for the third, etc.). If the market wage for employees is $7 an hour, how many employees should Clark hire?

Question

Quizplus · Accepted Answer

To determine how many employees Clark should hire, we need to compare the marginal product of labor for each employee to their market wage.

Employee 1: MPL = $128, wage = $7, MPL > wage, hire

Employee 2: MPL = $64, wage = $7, MPL > wage, hire

Employee 3: MPL = $32, wage = $7, MPL > wage, hire

Employee 4: MPL = $16, wage = $7, MPL > wage, hire

Employee 5: MPL = $8, wage = $7, MPL > wage, hire

Employee 6: MPL = $4, wage = $7, MPL < wage, do not hire

Therefore, Clark should hire a total of 5 employees, and the answer is B.

Clark Starts a Coffee Shop and Begins Hiring Employees