## Thursday, November 10, 2016

### 2008 B Micro FRQ #3

2008 B Micro FRQ #3

(A) After which worker do diminishing marginal returns begin?

Make a chart.

What is Diminishing Marginal Returns?

From the Resource Costs (Labor) Cheat Sheet here.

The MRP, marginal revenue product increases to \$20 with the hiring of the 1st worker. The second worker brings in \$32. The third worker brings in \$20 and every worker hired after the second brings in less revenue. The returns fall after hiring the second worker.

(B) Calculate the Marginal Physical Product of the 5th worker.

What is the marginal physical product?

For the AP exam, where the input of labor (number of workers hired) increases by one at a time you should use MP marginal product and Marginal Physical Product interchangeably. MP & MPP are different when hiring more than one labourer at a time.

The marginal product (product produced by the 5th worker) is 5 units of the good.
Understand that the change in production from the 4th worker to the hiring of the 5th worker created an additional 5 hats.
Again, the question is simply asking how many hats are produced by the 5th worker.

(C) Calculate the marginal revenue product of the 3rd worker.

Chart -
3rd worker - MP(10) X P(2) = \$20
The 3rd worker brings in \$20 and costs us \$15

(D) How many workers will be hired to maximise profit?

Profit Max for hiring is where MRP  = MRC
Or as close as possible without losing money.

**hiring the 4th worker makes us \$1 of profit.
but
**hiring the 5th worker would cost us \$5, a loss

(E) If GW has fixed costs equal to \$20, what will be the company's show-run profit from hiring
two workers?

Remember don't you, that MC (wage) is a variable cost and VC+FC = TC

So, if the wage of each worker is \$15 then the wage for the two workers is \$30. This is the VC. The fixed cost is \$20. ((This is not \$20 per worker so don't double it.))

VC (\$30) + FC (\$20) = TC (\$50)

Remember that Profit = TR - TC

The MRP or Total Revenue earned from hiring two workers is (\$20 + \$32) = \$52

So, TR(\$52) - TC(\$50) = Profit of \$2

(F) If the price of hats increases, what will happen to the number of workers hired in the short-run? Explain.

MRP (additional revenue per additional worker hired) The formula for MRP is MP x P = MRP.

So if either the MP (productivity) or the P (price of the good) increases then the MRP will increase.

If the MRP increases then more workers will be hired as now it will be more profitable to hire an additional worker.