The table below represents a production schedule for Quincy’s Quiche Corner, a r

Question

The table below represents a production schedule for Quincy’s Quiche Corner, a restaurant in a mall that sells quiches. Assume Quincy’s operates in a perfectly competitive environment (in both input and output markets), so it is both a price-taker and a wage-taker.

a) Fill in the missing values in the table, assuming the selling price per quiche is $3.

    Workers   Output (quiches)    Marginal Product        Value of Marginal Product

                          

     0                 0

     1                 10                         10                  $30

     2                 18                         _____               $24

     3                 24                             6                  _____

     4                 28                         _____               $12

     5                 30                         _____               _____

b) Does marginal product increase or decrease as additional workers are hired?

Employees are primarily high school students with virtually identical skills as quiche makers, and they are paid a wage rate of $8.00 per hour.

c) If the firm follows the profit-maximizing rule, hiring additional workers as long as the value of marginal product exceeds the wage rate (or marginal profit is positive), how many workers will the firm hire?

d) Total Revenue equals price ($3) multiplied by the number of quiches produced per hour. Quincy’s has total fixed cost equal to $18 per hour. Total cost is equal to labor costs (wage rate multiplied by the number of workers employed) plus total fixed cost. Profit is equal to Total Revenue minus Total Cost. Calculate the firm’s total revenue (TR), total cost (TC), and profit, assuming it is a profit maximizer.

          TR = $                           TC = $                            Profit = $

Explanation / Answer

Answer (a) - Production schedule of ''Quincy’s Quiche Corner'' has been given. The price of a quiche is $3. There is perfect competition in the market labor market and goods market. The firm is price taker and wage take also. The completed table has been given below. We know marginal product of the labor is the change in total output due hiring of an additional labor.

MPn = TPn - TPn-1

Value of marginal product is price time marginal product.

VMP = MP * P

(b) We can see in the given table marginal product of labor is decreasing from second unit of labor. First unit of labor produces 10 units but 2nd units produce only 8 units. MP is decreasing for every additional unit of labor.

(c) The wage rate is paid to the worker, $8 per hour. Thus the firm will hire labor till value of marginal product is equal to the wage rate. Look at the table, firm can hire 4 labor from the market because VMP > wage rate. If firm hires 5 worker then VMP< wage rate. The value of marginal product of 5th worker is $6 only. Thus the firm will not hire 5th worker.

(d) Quincy’s has total fixed cost equal to $18 per hour. The will hire 4 worker from the market. So, variable cost of the firm is

VC = 4 * 8

VC = 32

TC = TFC + VC

TC = 32 + 18

TC = $50

Total revenue from output produced by 4 workers is the addition of all marginal product of labor time price.

TR = P * (10 + 8 + 6 + 4)

TR = 3 * 28

TR = $84

Profit = TR - TC

Profit = 84 - 50

Profit = $34

Worker Output MP VMP (MP*3) 0 0 1 10 10 $30 2 18 8 $24 3 24 6 $18 4 28 4 $12 5 30 2 $6

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