A small firm sells its products (surfboards) and buys labour in a
competitive market.  The table below indicates the relationship
between the quantity of labour employed and total output of this firm.
 It sells the surfboards for $200 each

Quantity of labour hired             Total output            Marginal
revenue
(number per week)                    (number per week)       Product
of labour
                                                             $ per
worker
0                                     0
1                                     4
2                                     10 
3                                     15
4                                     19
5                                     22
6                                     24 
7                                     25
8                                     25

a.   Complete the marginal revenue product of labour colum
     (pls show me the working - how you did it)

b.    How many workers will this firm employ if the price of
surfboards is $200 each and the market wage is $200 a week?  How many
surfboards will the firm produce?
(pls show me the working - how you did it)

Hi again makbool-ga,

Lets first define marginal reveune product of labour - it is the
revenue resulting from hiring additional labour resources. In equation
form:

Marginal revenue product of labour per worker 
       = ((Change in ouput)*(revenue per unit)) / (Change in labour
hired)

In your table, the quantity of labour hired per week increases by one,
therefore the change in labour hired always equals one.

Below is the completed table:

Quantity of labour hired        Total output            Marginal
revenue
(number per week)              (number per week)       Product of
labour
                                                       $ per worker
0                                     0                      n/a
1                                     4                      $800
2                                     10                     1200 
3                                     15                     1000
4                                     19                      800
5                                     22                      600
6                                     24                      400
7                                     25                      200
8                                     25                        0


In order to find out the number of workers that will be employed, we
need to use the values in the final column of the above table. This is
the formula for profit as a function of quantity of labour hired
(which we are trying to maximize):

Profit(labour) = 200*(output) - 200*(labour)

Profit(6) = 200*24 - 200*6 = $3600
Profit(7) = 200*25 - 200*7 = $3600
Profit(8) = 200*25 - 200*8 = $3400

Since at Profit(8), the value decreases, we know that the maximum has
been reached at the prior value. Therefore we can conclude the
following:

1. The firm will employ either 6 or 7 employees
2. The firm will produce 24 or 25 surfboards (depending on how many
workers are employed)
3. In both scenarios, the profit is $3600.


If you have any problems understanding the above information please
feel free to post a clarification. Good luck in your continued
economic journeys :)

Cheers!

answerguru-ga