Question

Debbie owns a small bakery and can hire workers to produce snack cakes selling in a competitive output market at $10 each. If Debbie must pay each worker a competitive market wage of $40 per day, how many workers will she hire to maximize profit

Answer 1

Based on the selling price and market wage rate, the number of workers she should hire to maximize profit is 5 workers.

What is the profit maximizing quantity?

This is the point where the Marginal revenue will be equal to the marginal cost which is the wage rate of $40 in this scenario.

Revenue at various labor quantities

4 workers:                                                         5 workers

= 21 units x 10 per unit                                     = 25 x 10

= $210                                                               = $250

Marginal Revenue at 5 workers

= Revenue at 5 workers - Revenue at 4 workers

= 250 - 210

= $40

This is equal to the marginal cost so 5 workers is the profit maximizing quantity.

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