Question

AP MICROECONOMICS 1. GW Company produces and sells hats in a perfectly competitive market at a price of $2 per hat. Assume that labour is the only variable input and the wage rate is $15 per unit of labour per day. The table below shows GW's short-run production function for hats. 1 2 3 4 5 6 Number of workers 0 per day 0 10 26 36 44 49 52 Output of hats per day (a) After which worker do diminishing marginal returns begin? (b) Calculate the marginal physical product of the fifth worker. (c) Calculate the marginal revenue product of the third worker. (d) How many workers will GW hire to maximize profit? (e) if GW Company has fixed costs equal to $20, what will be the company's short-run economic profits from hiring two workers? (1) If the price of hats increases, what will happen to the number of workers hired in the short run? Explain.

Answer 1

Answer:

With the information in the question, we can make the following table:

Number of        Output of     Marginal  Marginal  Marginal

workers/day     hats/day       Product   Revenue  Cost

0                        0                    0              $0             $0

1                         10                   10            $20           $15

2                        26                  16            $32           $15

3                        36                  10            $20           $15

4                        44                  8              $16            $15

5                        49                  5             $10            $15

6                        52                  3             $6             $15

(a) After which worker do diminishing marginal returns begin?

As it can be seen in the table, after the third worker is hired, the diminishing marginal returns begin, because while the marginal product of the second worker is 16 hats, the marginal product of the third worker is 10 hats.

(b) Calculate the marginal physical product of the fifth worker.

The marginal product of the fifth worker is 5 hats.

(c) Calculate the marginal revenue product of the third worker.

The marginal revenue of the third worker is $20.

(d) How many workers will GW hire to maximize profit?

It should hire four workers. By the fourth worker, the marignal revenue is $16, while the marginal cost of hiring the additional fourth worker is $15. In a perfectly competitive market, the profit maximization point is obtained where marginal revenue = marginal cost, which is almost the case here.

(e) if GW Company has fixed costs equal to $20, what will be the company's short-run economic profits from hiring two workers?

If two workers are hired, the total revenue is $52. If the company has fixed costs of $20, and hires two workers costing each $15, the total costs are $50, therefore, in the short-run, the profit is $2.

(1) If the price of hats increases, what will happen to the number of workers hired in the short run?

The number of workers hired will increase because a higher price for hats means a higher marginal revenue for each worker.