Zaxon procduces one product and labour is the only variable resource in the production process. In the short run, Zaxon faces a horizontal demand curve at $20 per unit. The average product of labor in the short run is: Resource units Average product of labour 1 25 2 22.5 3 20 4 17.5 if the price of each unit of labour (worker days) is $250, and only whole units can be employed, how many units of labour will Zaxon employ? 1 2 3 4 Can someone please explain this question. I really don’t understand it.
Produces one product = only one type of product is produced Horizontal demand curve = perfect competition, produce where marginal cost = marginal revenue = price of the product = $20 Only whole units of labor can be employed: only full time workers Since labor is the only variable cost, and fixed costs are the same no matter the level of production, it is safe to use only the change in variable cost when calculating the marginal cost. Variable cost of production: @1 =250 @2 =500 @3 = 750 @4=1000 Total product of labor=number of workers*average product of labor @1 =1*25 = 25 @2 =2*22.5= 45 @3 = 3*20= 60 @4=4*17.5= 70 Total revenue: @1 =20*25 = 500 @2 =20*45 = 900 @3 = 20*60= 1200 @4=20*70= 1400 Marginal cost of production: @2 =(500 -250)/(45-25)=12.5 @3 = (750-500)/ (60-45)=16.67 @4=(1000-750)/(70-60)=25 Marginal product revenue: @2 =(900 -500)/(45-25)=20 @3 = (1200-900)/ (60-45)=20 @4=(1400-1200)/(70-60)=20 @ 4 workers, the marginal cost is above the price of the product, the company would produce at a loss. @ 3 workers, the marginal cost is below the marginal product revenue and below the price charged, but is higher (therefore more close to the perfect competition condition of MR=MC=P) than @2 workers. Since the company can employ only whole units of labor, the answer must be C. Employ 3 workers.