Table 18-B
Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day.
-Refer to Table 18-11. Assume that MadeFromScratch is a competitive, profit-maximizing firm. If the market price of cupcakes increases from $2.00 to $2.50, how many workers would the firm then hire?
A)2 workers
B)3 workers
C)4 workers
D)5 workers

Question

Table 18-B
Consider the following daily production data for MadeFromScratch, Inc. MadeFromScratch sells cupcakes for $3 each and pays the workers a wage of $325 per day. 
-Refer to Table 18-11. Assume that MadeFromScratch is a competitive, profit-maximizing firm. If the market price of cupcakes increases from $2.00 to $2.50, how many workers would the firm then hire?
A)2 workers 
B)3 workers 
C)4 workers 
D)5 workers

Quizplus · Accepted Answer

To maximize profits, the firm will hire workers up to the point where the marginal product of labor equals the wage rate.

At a price of $2.00 per cupcake, the firm maximizes profits by hiring 3 workers, as shown in Table 18-B.

If the price increases to $2.50 per cupcake, we need to calculate the new marginal product of labor for each level of employment.

MP of Labor for 1 worker = 18 cupcakes - 8 cupcakes = 10 cupcakes 
MP of Labor for 2 workers = 36 cupcakes - 18 cupcakes = 18 cupcakes 
MP of Labor for 3 workers = 51 cupcakes - 36 cupcakes = 15 cupcakes 
MP of Labor for 4 workers = 63 cupcakes - 51 cupcakes = 12 cupcakes 
MP of Labor for 5 workers = 70 cupcakes - 63 cupcakes = 7 cupcakes

To find the optimal level of employment, we compare the marginal product of labor to the wage rate.

At 2.50 per cupcake, we calculate the following:

MP of Labor for 1 worker = 10 cupcakes, which is less than $325, so the firm will not hire only 1 worker.

MP of Labor for 2 workers = 18 cupcakes, which is greater than $325, so the firm will hire 2 workers.

MP of Labor for 3 workers = 15 cupcakes, which is less than $325, so the firm will not hire all 3 workers.

Therefore, the firm will hire 2 workers if the market price of cupcakes increases from $2.00 to $2.50.

Table 18-B Consider the Following Daily Production Data for MadeFromScratch, Inc. MadeFromScratch