Table 18-9
The following table shows the production function for a particular business. The numbers represent the various labor and output combinations the firm may choose for its output on a daily basis.
-Refer to Table 18-9. Suppose this firm charges a price of $5 per unit of output and pays workers a wage equal to $160 per day. How many workers should this firm hire to maximize its profit?
A)2 workers
B)3 workers
C)4 workers
D)5 workers

Question

Table 18-9
The following table shows the production function for a particular business. The numbers represent the various labor and output combinations the firm may choose for its output on a daily basis. 
-Refer to Table 18-9. Suppose this firm charges a price of $5 per unit of output and pays workers a wage equal to $160 per day. How many workers should this firm hire to maximize its profit?
A)2 workers 
B)3 workers 
C)4 workers 
D)5 workers

Quizplus · Accepted Answer

To maximize profit, the firm should hire workers until the value of the marginal product of labor (VMPL) equals the wage rate. Looking at the table, we can calculate the VMPL for each level of labor input:

- VMPL for 1 worker = $25
- VMPL for 2 workers = $45
- VMPL for 3 workers = $60
- VMPL for 4 workers = $70
- VMPL for 5 workers = $75

Since the wage rate is $160 per day, the firm should hire workers until the VMPL equals or exceeds $160. It can be seen that the marginal product of labor is increasing up to 4 workers and then it starts to decrease. Thus, to maximize profit, the firm should hire 4 workers, which gives a VMPL of $70, equal to the wage rate. At this level of labor input, the firm can produce 140 units of output and earn a total revenue of $700 ($5 per unit). The total cost of production would be $640 ($160 wage per worker x 4 workers). Therefore, the firm's profit would be $60. Hiring more or less than 4 workers would lead to a lower level of profit.

Table 18-9 The Following Table Shows the Production Function for a Particular