Widgets and Wages Superior Company makes widgets and employs workers who it pays

Question

Widgets and Wages
Superior Company makes widgets and employs workers who it pays $100 a day. If it
hires only one worker, it can make 10 widgets. If it hires two, production rises to 19.
Three workers can make 27 widgets in total while four can make 34 widgets. It sells
widgets in a perfectly competitive product market for $12 each.
(1) What can we say about Superior Company's marginal physical product? Explain.
(2) How many workers should the firm hire? Give a quantitative answer.
(3)Instead of the unchanging $12 price, how would the situation be different if 10
widgets could be sold for $13, but 19 widgets for only $11? You need not give a
numerical answer.
(4) What kind of market are we talking about in (3)?

Explanation / Answer

Superior has a decreasing marginal physical product. The more workers it hires the less incremental output it gets from hiring an additional worker. It should hire two workers. Hiring a third only adds $96 to revenue (8 additional widgets time $12 per widget), but costs the firm $100. The situation would be different because marginal revenue would no longer be equal to price. So in making the decision on whether to hire more workers it would have to look at marginal revenue against the cost of incremental output rather than price. If the Company must drop the price to sell more widgets it is in a price seeker market (downward sloping demand curve) rather than a price taker market (horizontal demand curve).

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