Microeconomics – Week 8 Project Part 7
| Formulae | FC=constant | VC=cost x labor | TC = FC + VC | MC = TC change/ Output change | |
| Labor | Output | Fixed Cost | Variable Cost | Total Cost | Marginal Cost |
| 0 | 0 | $ 76 | $ 0 | $ 76 | – |
| 1 | 3 | $ 76 | $ 64 | $ 140 | $ 46.67 |
| 2 | 8 | $ 76 | $ 128 | $ 204 | $ 12.80 |
| 3 | 15 | $ 76 | $ 192 | $ 268 | $ 9.14 |
| 4 | 20 | $ 76 | $ 256 | $ 332 | $ 12.80 |
| 5 | 22 | $ 76 | $ 320 | $ 396 | $ 32.00 |
Marginal product (MP) is viewed as the level of additional output acquired by varying the labor element. Within the given table, the MP from 0 to 5 units of labor is noted as +3, +5, +7, -5, and -3 respectively. The MC attached to the given MP figures are $46.67, $ 12.80, $ 9.14, $ 12.80 and $ 32.00 respectively. It is therefore noted that the highest MP (+7) leads to the lowest MC ($ 9.14) marking the optimal labor unit as the third. This is due to the law of diminishing marginal returns to scale where labor enhances the production level up to the level of optimal MC, and furthering the same would lead to decreased returns as MC exceeds MP.
With the knowledge that MC=MR=P, then the optimal production level for highest profits would be marked by the quantity analogous to the assumed $ 25 price. When the price level is equivalent to the MC, then it means that the maximum level of profits is realized. From the table, the MC attached to the fourth worker is $12.80 thus rendering the relation that P > MC meaning that the production level is low and thus leading to losses within the short-run due to production shortages (Baumol & Alan 201). Therefore, hiring an additional worker would be more profitable although it would still be viewed as a less than optimal level as it does not reach MC=25. On the other hand, a fifth worker would be unprofitable as the MC would exceed price thus enhancing the cost element due to surplus labor. This is because the fifth worker bears an MC of 32 and the resulting relationship is P < MC. Surplus labor enhances the production level leading to excess products and therefore lessened revenue within the short run (Baumol & Alan 201).
Profit (Π) Calculation with P = $ 25 at different outputs (Q)
Π = TR – TC
Where TR = P*Q
At an output of 15
Π = $ (25 x 15) – 268
= $ 107
At an output of 20
Π = $ (25 x 20) – 332
= $ 168
At an output of 22
Π = $ (25 x 22) – 396
= $ 154
From the former discussion, we proposed that hiring the fourth employee would be beneficial to the company although at a less than optimal level since the MR=MC function is not yet fulfilled (Baumol & Alan 203). The computations have evidenced that a fourth employee would offer the highest return of $ 168 and therefore Hannah should hire four workers for profit maximization.
Works Cited
Baumol, William, & Alan Blinder. Economics: Principles and Policy. Clifton Park: Cengage Learning, 2011. Print.
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