Question

Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the MP of the 10th worker is 5 units of output and that the price of the output is $4. According to economic theory, in the short run, __________.a. the firm should hire additional workers.
b. the firm should reduce the number of workers employed.
c. the firm should continue to employ 10 workers.
d. more information is required to answer this question.

Answer 1

Answer:

A) the firm should hire additional workers.

Explanation:

if the marginal production of the tenth worker is 5 units or output and the price of each unit is $4, the the workers total marginal product revenue (MPR) = 5 units x $4 per unit = $20

Since the cost of hiring that tenth worker is $15 (less than MPR), then the company should hire more additional workers until the MRP = labor cost