Question

Lee's company of nine workers produces 150 units of a product with a marginal cost of $10 for the last unit. The product sells for $12 per unit. If Lee adds one additional worker, the marginal cost would be $13. In this case, Lee should
A) keep the number of workers at nine.

B) increase the number of workers to ten.

C) decrease the number of workers to eight.

D) increase the marginal cost per unit to $12.

Answer 1

The correct answer is A.

A company that seeks profit maximization in a competitive market needs to fulfill the following condition:

price  = marginal cost

• The marginal cost refers to the cost endured when producing one extra unit
• In a competitive market firms are price takers, hence the price equals the average revenue and the marginal revenue as well.
• When deciding the amount to be produced, firms need to use the equality : marginal revenue = marginal cost, which in a competitive environment is translated into: price = marginal cost

In the present example, the firm could only add an extra worker if the increased marginal cost (13) was not exceeding the price (12). As this increase in fact occurs, it is better that the company stays with nine employees.

Answer 2

Answer:A

Explanation:

The marginal cost refers to the cost endured when producing one extra unit

In a competitive market firms are price takers, hence the price equals the average revenue and the marginal revenue as well.

When deciding the amount to be produced, firms need to use the equality : marginal revenue = marginal cost, which in a competitive environment is translated into: price = marginal cost

In the present example, the firm could only add an extra worker if the increased marginal cost (13) was not exceeding the price (12). As this increase in fact occurs, it is better that the company stays with nine employees.

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