Question

EXERCISE

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

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

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

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

4. 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.

Answer 1

Following table shows the marginal physical product (MPP) schedule and marginal revenue product (MRP) schedule -

Quantity of workers	TPP	MPP	MRP (MPP * Price)
0	0	-	0
1	5	5	250
2	15	10	500
3	20	5	250
4	23	3	150
5	24	1	50
6	23	-1	-50

Question 1

As above table indicates, the marginal physical product of the 4th worker is 3 jeans.

Question 2

As above table indicates, the marginal revenue product of the 2nd worker is $500.

Question 3

To minimize average costs or to maximize profit, a firm hires labor upto that level corresponding to which wage rate equal marginal revenue product.

As above table shows, wage rate ($50) equals MRP when 5 workers are hired.

So, the store should hire 5 workers.