(Table: Total Product of Labor at Debbie's Bakery) Debbie owns a bakery and can hire workers to produce cakes selling in a competitive output market at $10 each.The table Total Product of Labor at Debbie's Bakery shows the relation between the number of workers and the number of cakes produced.Debbie must pay each worker a competitive market wage of $30 per day.Now suppose the government imposes a minimum wage law that all bakeries must pay no less than $50 per day.How will this affect her profit-maximizing hiring decision?
A)She reduces employment from six workers to one worker.
B)She reduces employment from six workers to five workers.
C)She reduces employment from six workers to four workers.
D)She increases employment from one worker to four workers.

Question

(Table: Total Product of Labor at Debbie's Bakery) Debbie owns a bakery and can hire workers to produce cakes selling in a competitive output market at $10 each.The table Total Product of Labor at Debbie's Bakery shows the relation between the number of workers and the number of cakes produced.Debbie must pay each worker a competitive market wage of $30 per day.Now suppose the government imposes a minimum wage law that all bakeries must pay no less than $50 per day.How will this affect her profit-maximizing hiring decision?
A)She reduces employment from six workers to one worker. 
B)She reduces employment from six workers to five workers. 
C)She reduces employment from six workers to four workers. 
D)She increases employment from one worker to four workers.

Quizplus · Accepted Answer

Debbie's profit-maximizing hiring decision is determined by comparing the additional revenue from hiring an additional worker to the additional wage cost of that worker. Before the minimum wage law, Debbie's profit-maximizing hiring decision was to hire six workers because the marginal revenue product (MRP) of the sixth worker was greater than his/her wage rate ($30).

However, after the minimum wage law, the wage rate is fixed at $50 per day, which is greater than the MRP of the sixth worker. Thus, Debbie's profit-maximizing hiring decision is to reduce employment from six workers to four workers, where the MRP of the fourth worker is equal to the wage rate of $50. This is because hiring the fifth and sixth workers would result in a negative profit since their MRP is less than the increased wage cost ($50). Therefore, Debbie will hire four workers to maximize her profit.

(Table: Total Product of Labor at Debbie's Bakery) Debbie Owns