A firm producing bottled water reports the following production information:
# of Workers Total Product
(gallons of water per hour)
0 0
10 1750
20 2750
30 3550
40 4150
50 4550
60 4750
The bottled water sells in a competitive market at a price of 10 cents per gallon. The firm hires workers in a competitive labor market at a wage of $7 per hour. The firm is currently hiring 20 workers and is considering hiring another 10 . What would you recommend the firm do? Why?
I would suggest that the firm hire the third worker. The marginal productivity of the extra ten workers is 800 gallons of water per hour. This translates into $80.00 of MRP (800 x 10 cents). Since the firm is paying $7 per worker the marginal cost of hiring the ten additional workers if $70.00 . This makes it profitable for the firm to hire them.
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