Question

In a competitive industry, suppose the marginal revenue product (MRP) of the last doughnut baker hired is $35, the MRP of the last bagel baker hired is $15, and a bakery must pay doughnut bakers $40 a day and bagel bakers $10 per day. To maximize profits the bakery should hire:

Answer 1

The bakery should hire fewer doughnut bakers and more bagel makers to maximize profits.

Step-by-step explanation:

From the question, we have:

MRP of the last doughnut baker hired = $35

MRP of the last bagel baker hired = $15

Cost of doughnut bakers per day = $40

Cost of bagel bakers per day = $10

Decision criteria are that:

1. When the MRP is greater than Cost per day, hire more.

2. When the MRP is less greater Cost per day, hire fewer.

Since from the above, we have:

1. MRP of the last doughnut baker hired < Cost of doughnut bakers per day => $35 < $40

2. MRP of the last bagel baker hired > Cost of bagel bakers per day => $15 > $10

Therefore, the bakery should hire fewer doughnut bakers and more bagel makers to maximize profits.