Question

A wheat farmer sells wheat in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is $10, the farmer employs five workers and the marginal product of the fifth worker is 3 bushels. What would you advise this farmer to do?

Answer 1

Answer:

Reduce the labor employed.

Explanation:

Generally the profit maximizing level of activity is where the marginal revenue product of labor is equal to or greater than the wage rate paid. This means that the 5th worker is actually not generating any positive revenue for the farmer as its contribution to revenue is,

Total contribution = Marginal product * price = 3 * 2 = $6

Where as wage paid is $10 thus it gives a contribution of 6-10 = -$4.

Thus the farmer is advised to reduce labor employed.

Hope this helps.