When a competitive firm hired nine workers,its profits were $100.When it hired 10 workers,its output went from 9 to 11 units.Each unit of output sold for $10 while the wage of each worker was $12.What is the firm's new profit level?
A) $20
B) $8
C) $108
D) $12

Question

Quizplus · Accepted Answer

First, we need to find the firm's marginal product of labor (MPL):
MPL = (change in output) ÷ (change in labor)
MPL = (11 - 9) ÷ (10 - 9) = 2

Since each unit of output sells for $10, the firm's total revenue from producing 11 units is:
Total revenue = Price x Quantity = $10 x 11 = $110

Next, we need to calculate the firm's total cost:
Total cost = Total wage cost + Total variable cost
Total wage cost = Wage per worker x Number of workers = $12 x 10 = $120
Total variable cost = Total cost - Total fixed cost = (9 workers' output x $10 per unit) - $100 = $-10

Notice that total variable cost comes out to be negative. This is because the firm's total cost decreases when it hires an additional worker (since the MPL is greater than the wage rate). This implies that the firm should continue to hire workers until the MPL = wage rate.

Finally, we can calculate the firm's profit:
Profit = Total revenue - Total cost = $110 - ($120 + $(-10)) = $110 + $10 = $120

Since the original profit level was $100, the firm's new profit level is $120 - $100 = $20 more. Therefore, the correct answer is C.

When a Competitive Firm Hired Nine Workers,its Profits Were $100