Question

Say we change the ceteris paribus assumption to allow each employee to be more productive. For example, we add a zero-cost management technique that allows for the division of labor based on specialization. As a result, each employee's marginal product increases by one. Should the car wash hire more employees

Answer 1

Answer:

The car wash should hire more employees as long as the marginal cost (the extra money that goes to the paying the wage of the new employee) is lower or equal to the marginal benefit (the extra amount of income that the employee will generate for the company).

This is because as long as marginal cost is lower than marginal benefit, hiring an extra worker will produce economic benefits for the firm, and if marginal cost and marginal benefit are equal, the firm at least will break even.

On the other hand, when hiring an extra worker has a marginal cost that is higher than the marginal benefit the worker will produce, the firm will then face economic loss, and should therefore put off hiring any more employees.