Question

Luigi's Pizzeria is considering to hire two more workers, Jessie and Kathy. Suppose that the market wage for another worker is $80 per day. Jessie would generate a marginal product of 10 pizzas, while Kathy would generate a marginal product of 9 pizzas. If pizzas sell for $9 each, what should Luigi do?

a) Luigi should not hire either additional worker.
b) Luigi should hire only the first additional worker, Jessie.
c) Luigi should hire only the second additional worker, Kathy.
d) Luigi should hire both workers as long as their marginal products do not change.

Answer 1

D) Luigi should hire both workers as long as their marginal products do not change.

Step-by-step explanation:

As long as the employees' marginal revenue product equals or exceeds their marginal cost, they should be hired.

Marginal revenue product = marginal physical output x price per unit

The marginal cost for hiring both Jessie and Kathy is $80.

Jessie's marginal revenue product = 10 pizzas x $9 per pizza = $90 > $80

Kathy's marginal revenue product = 9 pizzas x $9 per pizza = $81 > $80