Question

Ron’s Woodturning Company makes high quality wooden bowls from exotic hardwoods from around the world. The firm may sell all it produces to retail outlets at $10/bowl. Ron can hire all of the workers he needs at a market wage of $90/day per worker. Ron’s short-run production function is shown below:

Total Number of Bowls per Day Value of MP of Labor # of Workers Marginal Product 10 25 45 60 72 80 85 82 4

a. As Ron hires the first, the second and the third worker, what happens to his output? What happens to his marginal product? Explain why this could be occurring.

b. With which worker do diminishing marginal returns begin?

c. Calculate the VMPL (also known as, marginal revenue product) for the fifth worker. Show your work for full credit.

d. How many workers should Ron hire to maximize profit? Explain why that number is the best for maximizing profit.

e. In what type of market structure does Ron’s firm compete? How do you know? In what type of market does Ron’s firm hire workers? How do you know?

Answer 1

No of workers	Total number of Bowls per day	Marginal Product	Value of MPL of labor	TC	TR	Profit
0	0			0	0	0
1	10	10	100	90	100	10
2	25	15	150	180	250	70
3	45	20	200	270	450	180
4	60	15	150	360	600	240
5	72	12	120	450	720	270
6	80	8	80	540	800	260
7	85	5	50	630	850	220
8	82	-3	-30	720	820	100

a. Output increases at an increasing rate as the MP increases

b. Diminishing returns starts at 4th worker

c. VMPL = MP*price of output = (72-60)/(5-4)*10 = 120

d. From the above table, the profit is maximum at 5th labor (TR-TC). Also, Value of MPL of labor($120) is higher than wage rate ($90)

e. As it sells at same price of $10, which is a horizontal curve irrespective of quantity , it is competing in perfect competition. Also, as the labor is in perfect competition as labors are available at same wage rate and it hires labors based on the maximizing profit criteria where value of MPL is higher than marginal cost of labor.