Ms. Smith, the owner and manager of the Clear Duplicating Service located near a

Question

Ms. Smith, the owner and manager of the Clear Duplicating Service located near a major university, is contemplating keeping her shop open after 4PM and until midnight. In order to do so, she would have to hire additional workers. She estimates that the additional workers would generate the following total output (where each unit of output refers to 100 pages duplicated). If the price of each unnit of output is $10 and each worker hired must be paid $40 per day, how many workers should Ms. Smith hire?

Wokers hired 0   1     2   3    4    5   6

Total Product 0 12 22 30 36 40 42

Ms. Smith should hire workers as long as their marginal revenue product (MRP) exceeds their marginal resource cost (MRC) and until MRP=MRC. MRP=MR x MP = P x MP = $10 x MP (use information in the problem to calculate MP). MRC=wages=$40

Explanation / Answer

The marginal product is calculated as : MP = change in total product/change number of labours hired.

Now the firm would hire labours until the VMPL (value of marginal product of labour) equals the cost (cost of hiring labours is the wages paid to them).

Also VMPL = P x marginal product.

Thus VMPL = 10*4 = $40 which is equal to the wages.

Thus Ms.Smith should hire 5 units of workers.

Labour TP MP VMPL 0 0 nil nil 1 12 12 120 2 22 10 100 3 30 8 80 4 36 6 60 5 40 4 40 6 42 2 20

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