José,a corn farmer operating in a perfectly competitive market,pays his workers $8 an hour.At his current level of labour use,the marginal product of an additional hour of labour is 3 kilograms of corn.The market price of corn is $2.75.To maximize his profits,Jose should:
A) hire more labour.
B) hire less labour.
C) not change the amount of labour.
D) This question cannot be answered without knowing the average product of labour.

Question

Quizplus · Accepted Answer

To determine the optimal level of labour use, José should continue to hire more workers as long as the additional revenue generated by each hour of labour (the marginal revenue product) exceeds the cost of hiring an additional worker (the wage rate).

In this case, the marginal product of labour is given as 3 kilograms of corn per hour of labour. If we assume that each kilogram of corn sells for $2.75 (the market price), then the marginal revenue product of an additional hour of labour is:

MRP = marginal product x market price = 3 kg/hour x $2.75/kg = $8.25/hour

Since the wage rate is $8/hour, José's marginal revenue product exceeds his marginal cost of hiring an additional worker, so he should continue to hire more workers until the marginal revenue product equals the wage rate. This will maximize his profits.

José,a Corn Farmer Operating in a Perfectly Competitive Market,pays His