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Profit Maximisation

How do I go about calculating the answer to this?


5. A profit maximizing firm which has a given capital stock has to decide how many workers to hire per week in the range of 28-33. The weekly wage that has to be paid to every additional worker is constant at £1500 and the total revenue per week received after hiring the numbers of possible workers is given below:

Workers 28 29 30 31 32 33

Total revenue £60,100 £62,200 £64,000 £65,600 £67,150 £68,550
How many workers will be hired?
a) 29.
b) 30.
c) 31.
d) 32.
e) 33.
The firm will continue to hire labour so long as marginal revenue > marginal cost
The marginal cost is constant (£1500)
We can calculate the marginal revenue for each unit of labour
L MR
28 -
29 2.1
30 1.8
31 1.6
32 1.55
33 1.4

Therefore the firm will hire 32 workers. If it hired 33 then MC>MR and it could make more money by sacking a worker. If it hired 31 or fewer workers then MR>MC and it could make money by hiring another worker.

Does this make sense?
Rhys
Btw, the MR units have been divided by 1,000 for simplicity
Original post by rasclerhys
Btw, the MR units have been divided by 1,000 for simplicity


How did you calculate MR?
Marginal revenue is just the change in revenue. Therefore I did (Revenue at 29)-(Revenue at 28) for the MR(29) and then (Revenue at 30)-(Revenue at 29) etc.
Make sense?
Rhys
Original post by rasclerhys
Marginal revenue is just the change in revenue. Therefore I did (Revenue at 29)-(Revenue at 28) for the MR(29) and then (Revenue at 30)-(Revenue at 29) etc.
Make sense?
Rhys


Okay, that makes sense, so why is it 32 workers?

I don't get the MC>MR bit
Do you study economics at university (sarcasm not intended, but surely you've covered this)?
A firm will continue to hire workers until the Marginal Revenue equals the Marginal Cost.

If the Marginal Revenue were greater than the Marginal Cost (MR>MC) then I can make more money from hiring a worker (i.e. they produce a lot of revenue) than it costs me to hire them (their wage). If hiring an additional worker brings in £10 of revenue but only costs me £8 in wages then I am better off hiring this worker and making the £2 difference.

If the Marginal Revenue were less than the Marginal Cost (MR<MC) then it costs me more money to hire a worker than they make me, so I should sack some workers. E.g. if a worker brings in £10 but costs me £12 then I should fire the worker until MR=MC.

Rhys
Original post by rasclerhys
Do you study economics at university (sarcasm not intended, but surely you've covered this)?


No, I'm just interested :smile:
Original post by James E Walker
No, I'm just interested :smile:


That makes more sense! Would claim my money back otherwise :wink:

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