Profit Maximisation Watch

James E Walker
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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.
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rasclerhys
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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
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rasclerhys
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Btw, the MR units have been divided by 1,000 for simplicity
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James E Walker
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(Original post by rasclerhys)
Btw, the MR units have been divided by 1,000 for simplicity
How did you calculate MR?
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rasclerhys
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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
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James E Walker
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(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
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rasclerhys
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Do you study economics at university (sarcasm not intended, but surely you've covered this)?
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rasclerhys
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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
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James E Walker
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(Original post by rasclerhys)
Do you study economics at university (sarcasm not intended, but surely you've covered this)?
No, I'm just interested
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rasclerhys
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(Original post by James E Walker)
No, I'm just interested
That makes more sense! Would claim my money back otherwise
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