Question

Mr. Cobb, a corn farmer, pays his workers $8 an hour. At his current level of labor use, the marginal product of an additional hour of labor is three bushels of corn. The market price of corn is $2.75. In order to maximize his profits, Mr. Cobb should:

a. hire more labor because the marginal revenue product is below the wage.
b. not hire more labor because the marginal revenue product exceeds the wage.
c. raise the price of the corn that he sells.
d. not hire more labor because the marginal revenue product is below the wage.
e. hire more labor because the marginal revenue product exceeds the wage.

Answer 1

The correct answer is Option (E).

Step-by-step explanation:

According to the scenario, the given data are as follows:

Worker Wage = $8

Rate of corn bushel = $2.75

Work done = 3 bushels per labor hour

So, from this we can calculate the marginal revenue of product,

Marginal revenue of product = Rate of corn bushel × Work done

= $2.75 × 3 = $8.25

As, Marginal Revenue > Wage

More marginal revenue means more profit.

Hence, Mr. Cobb should hire more labor because the marginal revenue product exceeds the wage.