A manager of a firm with market power faces the marginal revenue product and average revenue product curves shown below.The firm incurs weekly fixed costs of $1,800.The firm employs a single variable input,labor,which costs $600 per worker each week. Given the above,the maximum profit the firm can earn is _____________.

Question

A manager of a firm with market power faces the marginal revenue product and average revenue product curves shown below.The firm incurs weekly fixed costs of $1,800.The firm employs a single variable input,labor,which costs $600 per worker each week.  Given the above,the maximum profit the firm can earn is _____________.

Quizplus · Accepted Answer

To maximize profit, the firm should hire labor up to the point where the marginal revenue product (MRP) equals the wage rate. In this case, that would be where MRP intersects with the wage rate of $600, which occurs at a quantity of 3 workers.

At a quantity of 3 workers, the MRP is $1,800 and the average revenue product (ARP) is $600. Therefore, the total revenue from 3 workers is $1,800 and the total variable cost is $1,800 ($600 per worker x 3 workers).

The total cost of production is the sum of the total fixed cost ($1,800) and the total variable cost ($1,800), which equals $3,600.

The total revenue ($1,800) minus the total cost ($3,600) equals a loss of $1,800.

However, since the fixed costs are unavoidable in the short run, the firm should still produce as long as they can cover their variable costs. Therefore, the best choice is B, which represents a profit equal to the total revenue ($1,800) minus the variable cost ($1,800), or $1,800.

A Manager of a Firm with Market Power Faces the Marginal