You’ve been hired as an economic consultant to a price-taking firm that produces
ID: 1204076 • Letter: Y
Question
You’ve been hired as an economic consultant to a price-taking firm that produces shirts. The firm already has a shirt factory, so it is operating in the short run. The price of shirts is $5, the hourly wage is $12, and each shirt requires $1 worth of material. At the current level of output (20 workers and 70 shirts per hour), the firm is losing money: Its total cost exceeds it total revenue. The firm has experimented with different numbers of workers and discovered that 21 workers would produce 72 shirts; 15 workers would produce 60 shirts; and 16 workers would produce 63 shirts. You job as a consultant is to tell the firm which of these four options to take; and explain and show your calculations as to why you selected an option.
Explanation / Answer
Given the info above, please see the computation below:
Formulae:
So, given the calculations the firm should go with case 2 i.e. 15 workers & 60 shirts
Please note case 3 i.e. 16 workers & 63 shirts also generates the same profit, but the percentage of profit is lower.
No of workers Total wage No. of shirts Total Cost of raw material Total Selling price Profit Percentage profit 21 252 72 72 360 36 10% 15 180 60 60 300 60 20% 16 192 63 63 315 60 19%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.