Question

2. Table: Droid-making firm.

Numbers of Laborers	Units of Output	Marginal Product	Value Marginal Product
0	0	--	--
1	10
2	18
3	25
4	30
5	33
6	34

1. Complete the table’s marginal product column. Describe what is happening.
2. Suppose that each unit of output sells for $10. Complete the VMP column.
3. Assuming that the firm pays $45 wages per worker and that droids cost $10 to make, how many droid-making laborers should this firm employ? How much profit will it earn?

Answer 1

Numbers of Laborers	Units of Output	Marginal Product	Value Marginal Product
0	0	--	--
1	10	10	100
2	18	8	80
3	25	7	70
4	30	5	50
5	33	3	30
6	34	1	10

1) Marginal Product is the change in units of output when additional laborers are hired

Marginal Product = Change in output / change in labor

For example at 3 laborers

Marginal Product = 25 - 18 / 3 - 2

Marginal Product = 7 / 1

Marginal Product = 7

Hence all are calculated like this

2) Value of Marginal product also know as marginal revenue product refers to the additional revenue generated by an additional worker hired

Value Marginal Product = Marginal Product x selling price

Marginal Product x selling price	Value Marginal Product
--	--
10 x 10	100
8 x 10	80
7 x 10	70
5 x 10	50
3 x 10	30
1 x 10	10

3) Now to calculate how many workers should be hired we need to compare the value marginal product column with the wage rate

Reason

The value marginal product is the additional revenue generated by hiring additional labor and the wage rate is the additional cost of hiring labor. Now if the additional revenue generated by hiring additional labor is greater than the additional cost of hiring labor then the firm is achieving profit until both become equal because after that additional cost will be greater than additional revenue which is a loss for a firm.

Numbers of Laborers	Value Marginal Product		Wage Rate
1	100	>	45
2	80	>	45
3	70	>	45
4	50	>	45
5	30	<	45
6	10	<	45

So from the above table 4 labors should be hired because from 5th labor additional revenue is less than additional cost which is a loss for a firm.

4) Profit

Profit = Total Revenue - Total Cost

Total Revenue = Price x Quantity

Total Revenue = 10 x 30

Total Revenue = 300

Total Cost = Cost price x Quantity

Cost price will be wages x no of laborers

Cost price = 45 x 4

Cost Price = 180

Profit = Total Revenue - Total Cost

Profit = 300 - 180

Profit = 120