Principles of Microeconomics / Unit 13 MIC 1205 worked example, 60 to 90 seconds
Building Marginal Revenue Product and Hiring
The idea
From a total product table and the product's price, compute marginal product as the change in output from each added worker, then marginal revenue product as marginal product times price. Given the wage, hire every worker whose marginal revenue product is at least the wage and stop at the first who falls short. Check by profit: total revenue at that number minus the wage bill should exceed the total at one worker more or fewer.
In practice
Worked example: the car wash's total product is thirty, fifty-six, seventy-eight, ninety-six, one hundred ten, one hundred twenty and one hundred twenty-six cars for one to seven workers, so marginal product is thirty, twenty-six, twenty-two, eighteen, fourteen, ten and six. At ten dollars a wash, marginal revenue product is three hundred, two sixty, two twenty, one eighty, one forty, one hundred and sixty. At a wage of one hundred fifty a day, the fourth worker adds one eighty and is hired; the fifth adds one forty and is not. Four workers: revenue nine hundred sixty, wages six hundred. At a wage of one hundred twenty the fifth is hired too.
Where people slip
Compute marginal product from the change in total product, not from the average; the fourth worker's product is eighteen, not ninety-six divided by four. And the wage is compared with the marginal revenue product of the last worker, not the average of all of them.
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