Labor to Maximize Profits

| May 25, 2015

Sullivan’s Custom Cabinets operate in a perfectly competitive market and employs labor and capital. Labor costs $30 a day. Machines cost $36 a day. Currently, Sullivan’s has six machines and the marginal revenue product of capital is $30. Output sells at $5 per unit. Sullivan’s hires you as a consultant and provides you with the following production function.

Workers (days)

Total Output

1

9

2

17

3

24

4

30

5

35

6

39

7

42

  1. Explain, in your own words, the meaning of MRP.
  2. How is MRP computed?
  3. Using the data presented, in the short run, how many workers would you recommend Sullivan’s hire per day to maximize profits?
  4. Explain how you arrived at this number.

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