Diane's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. She is a profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $20. The marginal productivity of the last worker that Diane hired was 2 tires per hour. What is the maximum hourly wage that Diane was willing to pay the last worker hired?
A)$10
B)$20
C)$40
D)There is insufficient information to answer this question.

Question

Quizplus · Accepted Answer

The maximum hourly wage Diane is willing to pay is equal to the value of the marginal product of labor. The marginal productivity of the last worker is 2 tires per hour, and the marginal cost of installing a tire is $20. Therefore, the value of the marginal product is 2 tires/hour * $20/tire = $40/hour.

Diane's Auto World Installs Tires on Automobiles, Light Trucks, and Sport