Advice for an Unprofitable Firm. You’ve been hired as an economic consultant by

Question

Advice for an Unprofitable Firm. You’ve been hired as an economic consultant by a price-taking firm that produces baseball caps. The firm already has a factory, so it is operating in the short run. The price of caps is $5, the hourly wage is $12, and each cap requires $1 worth of material. The firm has experimented with different workforces and the results are shown in the first two columns of the following table.

b. Is it sensible to continue to operate at a loss with 14 workers?
c. Would it be better to operate with 15 workers? Explain using the marginal principle

Explanation / Answer

price of caps is $5 the hourly wage is $12, and each cap requires $1 worth of material. a. Fill in the blanks in the table b. Is it sensible to continue to operate at a loss with 14 workers? Workers Caps Labor Cost Material Cost Variable Cost Total Revenue Marginal Cost of Caps A. 14 56 168 14 182 280 5 15 60 180 15 195 300 5 B. It is sensible to operate at a loss with 14 workers becasue in the short run, profits are higher than MC.

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