Question

al just opened a new bakery outlet in northwest phoenix. he owns 4 other shops throughout the phoenix area. given his past experience of operating his bakeries, he believes the first employee he hires will generate a marginal product of 50 loaves of bread a day, a second employee would add 40 loaves a day, a third employee would add 30 loaves, a fourth would add 20 loaves, and a fifth employee would add 10 loaves. al sells each loaf of bread for $5.00. assuming al's expectations as to the marginal product is correct, and assuming al can hire each employee for $100 per day, how many employees should al hire? why?

Answer 1

Al should hire four employees for his bakery outlet because each additional employee contributes to a diminishing marginal product, and he should only hire up to the point where the cost of labor equals the marginal revenue generated by the employee. The first four employees generate enough revenue to cover their costs, but hiring a fifth would result in a loss.

Step-by-step explanation:

Al needs to decide how many employees to hire for his new bakery outlet in Northwest Phoenix by considering the marginal product of labor and the marginal revenue generated by each additional employee. Given the information, each additional employee's marginal product is diminishing: the first employee adds 50 loaves a day, the second adds 40, and so on, with each loaf selling for $5. This means the first employee generates $250 in revenue per day (50 loaves * $5), the second generates $200 per day (40 loaves * $5), and so forth. With each employee costing $100 per day, Al should continue to hire employees up to the point where the marginal revenue from the employee's labor equals the cost of hiring them.

To determine the optimal number of employees to hire, we calculate the marginal revenue each employee brings in and stop before hiring an employee would not cover the cost of $100 per day. The calculations are as follows:

• 1st employee: $250 - $100 = $150 profit
• 2nd employee: $200 - $100 = $100 profit
• 3rd employee: $150 - $100 = $50 profit
• 4th employee: $100 - $100 = $0 profit
• 5th employee: $50 - $100 = -$50 loss

Based on these calculations, Al should hire up to the fourth employee as the revenue from the fourth employee's labor exactly equals the cost of hiring them, making the marginal profit zero. Hiring a fifth employee would result in a loss, as their labor cost would exceed the revenue they generate.