Question

Jewel was recently hired to manage Durable Jeans Inc. The shop sells jeans for $50 each. The fixed cost of keeping the factory open is $200 per day. Jewel is trying to decide how many workers to employ at $50 per day. Here is some relevant data:

Quantity of Workers              TPP (Total Physical Product or Output)

0                                               0

1                                               5

2                                              15

3                                               20

4                                               23

5                                               24

6                                               23

a. The marginal physical product of the 4th worker is what?

b. The marginal revenue of product of the 2nd worker is what?

c. To minimize average costs (and consequently to maximize profits), the store should employ how many workers?

e. Does the principle of diminishing returns to labor seem to apply in the above example? Explain how this concept is related to increasing marginal costs.

Please try to give more detailed answers. The more the better. Would really appreciate your help. Thank you in advance.

Answer 1

Marginal physical product of labor (MPL) = Change in output (Q) / Change in workers (L)

L	Q	MPL
0	0
1	5	5
2	15	10
3	20	5
4	23	3
5	24	1
6	23	-1

(a) MPL of 4th worker = 3

(b) Marginal revenue product (MRPL) of 2nd worker = MPL x output price = 10 x $50 = $500

(c) Profit is maximized when MRPL = Wage rate

MPL x $50 = $50

MPL = 1

MPL equals 1 when number of workers = 5

(e) From the 3rd worker, as number of workers is rising, MPL is falling, which means diminishing returns to labor is present. Diminishing returns to labor is associated with increasing marginal cost because, when MPL is rising, MC is falling, but in the range where MPL is falling (indicating diminishing returns to labor), MC is rising.