Question

Quantity of labor Total product of labor 0 0 1 3 2 10 3 16 4 21 5 25 6 28 Debbie owns a bakery and can hire workers to produce cakes selling in a competitive output market at $8 each. The table shows the relationship between the number of workers and the number of cakes produced. Debbie must pay each worker a competitive market wage of $45 per day. How many workers will she hire to maximize profit? O four five three O two

Answer 1

Here,

Cost of Labor = $45 per day

Selling price of Cake = $8

So Completing the table,

Quantity of Labor	Total Product of Labor	Total Revenue	Marginal Revenue	Marginal Cost
0	0	0	0	0
1	3	24	24	45
2	10	80	56	45
3	16	128	48	45
4	21	168	40	45
5	25	200	32	45
6	28	224	24	45

Total Revenue = total product * price

So For quantity of labor 2,

Total revenue = 10*8 = 80

MArginal Revenue = 80-24 = 56

MArginal Cost = 45 (fixed)

Now from the table, at labor 3 the marginal revenue is just over marginal cost while at 4 the marginal revenue is below

So she must choose 3 labors to maximize profit