Leisure Times, Inc., employs skilled workers and capital to install hot tubs. Th

Question

Leisure Times, Inc., employs skilled workers and capital to install hot tubs. The capital includes the tools and equipment workers use to construct and install the tubs. The installation services are sold in a competitive market for $1,000 per hot tub. Leisure Times is able to hire workers for $3,500 per month, including the cost of wages, fringe benefits, and employment taxes. The increase in the number of hot tubs installed as additional workers are hired is indicated in the following table Complete the third and fourth columns of the table by computing the marginal product as the number of employed workers changes and the marginal revenue product for each unit of labor when the competitive price for a hot tub is $1,000 Number of Workers Employed Number of Hot Tubs Installed Marginal Product Marginal Revenue Product (Hot Tub Installation Price = $1,000) Marginal Revenue Product (Hot Tub Installation Price = $900) 12 18 23 27 30 32 2 3 4 8 If Leisure Times is able to hire workers for $3,500 per month, it should hire workers to maximize its profit. Suppose the wages of skilled workers fall to $2,500 per month At this new wage, the firm should hire workers to maximize its profit.

Explanation / Answer

Ans:

Statement Showing Marginal Revenue Product

The profit maximizing level of output is where marginal revenue is equal to marginal cost.However marginal revenue near to marginal cost is considered.

1) When wage rate is $3500 per month, it should hire 5 workers. this level of output gives maximum profit.

2) When wage rate is $2500 per month, it should hire 6 workers. this level of output gives maximum profit.

3) 6 workers.

At the new installation price of $900 and a wage rate of $2500 per worker per month, Leisure times should employ 6 workers.

Number of workers employed Number of Hot tubs employed Marginal Product Marginal Revenue Product(Hot tub price = $1000) Marginal Revenue Product(Hot tub price = $900) 1 5 5 $5000 $4500 2 12 7 $7000 $6300 3 18 6 $6000 $5400 4 23 5 $5000 $4500 5 27 4 $4000 $3600 6 30 3 $3000 $2700 7 32 2 $2000 $1800 8 33 1 $1000 $900 9 34 1 $1000 $900

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