A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1,500 per week. If the price of each unit is $12,
a. the MR of hiring the worker is $1,500
b. the MC of hiring the worker is $1,200.
c. the firm should not hire the worker since MB
d. All the above
The correct answer and explanation is :
Let’s analyze the firm’s decision on whether to hire an additional worker.
Given Information:
- The additional worker increases total productivity by 100 units per week.
- The price per unit of the product is $12.
- The cost of hiring the worker is $1,500 per week.
Step 1: Marginal Revenue (MR)
Marginal Revenue (MR) is the additional revenue generated from hiring the worker. It is calculated as:
[
MR = \text{additional output} \times \text{price per unit}
]
[
MR = 100 \times 12 = 1,200
]
Step 2: Marginal Cost (MC)
Marginal Cost (MC) is the cost of hiring the additional worker, which is $1,500 per week.
Step 3: Decision Analysis
The firm should compare the Marginal Benefit (MB) or Marginal Revenue (MR) with the Marginal Cost (MC):
- If MR > MC, hiring is profitable.
- If MR < MC, hiring is a loss-making decision.
Here, MR = $1,200 and MC = $1,500, so:
[
MR < MC
]
This means that hiring the worker is not profitable since the additional revenue generated is lower than the cost of hiring.
Correct Answer:
(c) The firm should not hire the worker since MB < MC.
Explanation:
Since the firm would lose $300 per week by hiring this worker ($1,500 cost vs. $1,200 revenue), the rational decision is not to hire. In competitive business environments, firms aim to maximize profit, so hiring when MR < MC leads to losses.
Here is an image illustrating the economic decision analysis regarding hiring an additional worker. It visually represents the comparison between Marginal Revenue (MR) = $1,200 and Marginal Cost (MC) = $1,500, highlighting that hiring the worker is not a profitable decision. Let me know if you need further modifications!