Question

At Tuxi’s, tacos cost $2.50 (p=2.5) and the market wage for labor is $12.50. The optimal amount of labor is 6 workers.

Question: What would be the per-hour profits at Tuxi’s if capital costs $50 per hour?

Number of workers	Tacos	MPE	Average product	MRPE	Value of the AP
0	0	0	0
1	15	15	15	37.5	187.5
2	28	13	14	32.5	175
3	38	10	12.67	25.0	158.37
4	47	9	11.75	22.5	146.875
5	54	7	10.8	17.5	135.0
6	59	5	9.83	12.5	122.875
7	62	3	8.85	7.5	110.625
8	64	2	8.0	5.0	100.00
9	65	1	7.22	2.5	90.25

Answer 1

In the short run, the optimum point of production would be where the marginal revenue product of labor (MRPE) is equal to the price of labor ($12.5), which is occurring at L=6 and Q=59.

The variable cost would be $\dpi{80} L*12.5 = 6*12.5 = 75$ dollar per hour, while the fixed cost is given as $50 per hour. The total cost would be hence the variable cost plus the fixed cost, ie $75+$50=$125.

The total revenue would be $\dpi{80} TR = PQ$ or $\dpi{80} TR = 2.5*59 = 147.5$ dollars per hour.

The profit per hour would hence be $\dpi{80} \pi = TR - TC = 147.5 - 125 = 22.5$ dollar per hour.