Question

Areandina's Coffee Shop hires workers to make their latté coffees. The market for latté coffee is perfectly competitive, and latté coffees sell for $4.00 each. The labour market is competitive, and the wage rate is $40 per day. Table 1 shows the workers' total product, TP. Workers 1 2 3 4 5 6 Latté Coffees produced per day 7 21 33 43 51 55 Table 1 a) Calculate the marginal product of hiring the fourth worker. b) Calculate the value of the marginal product of the fourth worker c) How many workers will Areandina's hire to maximize profit? d) How many latté coffees per day will Areandina's produce to maximize profit? - e) Ifthe price of latté coffee rises to $5, how many workers will Areandina's hire?

Answer 1

We have the following information

Workers	Latte Coffees produced per day	Marginal Product	Value of Marginal Product (VMP) when price is $4.00
1	7	--	--
2	21	14	56
3	33	12	48
4	43	10	40
5	51	8	32
6	55	4	16

Marginal product is the addition to the total product when labor is increased by one unit. Value of marginal product is Marginal Product × Price ($4.00 per Latte Coffee). Marginal product of the fourth worker is 10, and value of marginal product of the fourth worker is 40.

The equilibrium amount of workers that Areandina will hire will be determined by equating the VMP with the wage rate ($40.00 per day). Since, for four workers the VMP is equal to the wage rate so Areandina will hire 4 workers to maximize profit.

Areandina will produce 43 Latte coffees every day.

Workers	Latte Coffees produced per day	Marginal Product	Value of Marginal Product (VMP) when price is $5.00
1	7	--	--
2	21	14	70
3	33	12	60
4	43	10	50
5	51	8	40
6	55	4	20

The equilibrium amount of workers that Areandina will hire will be determined by equating the VMP with the wage rate ($40.00 per day). Since, for five workers the VMP is equal to the wage rate so Areandina will hire 5 workers to maximize profit.