Question

The additional output obtained by adding an additional worker is 50 units. Each unit can be sold for \(\$ 2 .\) Is it worth hiring the additional worker if she is paid \(\$ 150\) a day? Explain your answer.

Short answer

No, it wouldn't be worth hiring the additional worker as the revenue from the extra units ($100) is less than the cost of hiring ($150).

Step-by-step solution

Calculate the revenue from the additional units

The additional worker produces 50 units and each unit can be sold for $2. The revenue from these additional units is calculated by: Number of Units * Price per unit = Revenue. Plugging in the values, we have: \(50 * 2 = 100\). So, the revenue obtained from the additional worker is $100.

Compare the Revenue with the cost of hiring

Now, it's time to check if the revenue of $100 is greater than the cost of hiring the worker, which is $150. Comparing these two values, it is clear that $100 (revenue) is less than $150 (cost).

Make a decision

Since the revenue from the additional worker is less than the cost of hiring, therefore, it would not be financially beneficial to hire the additional worker.

Key concepts

Marginal Cost

Marginal Cost is a crucial concept in economics that helps businesses understand the cost of producing one additional unit of a good or service. In simpler terms, it's the extra cost incurred to produce one more unit.

When businesses contemplate expanding their production, they should first figure out the marginal cost. This value can guide them in making informed decisions. If the marginal cost is lower than or equal to the price at which they sell the product, it could be beneficial to increase production. However, if the marginal cost is higher, the business may incur a loss on each additional unit.

In our exercise scenario, we find out that hiring an additional worker results in a marginal cost of $150 per day. Since this is the expense associated with producing an extra 50 units, it implies the cost per unit is $3. This understanding of costs helps in evaluating whether expanding production is justifiable.

Marginal Revenue

Marginal Revenue refers to the additional income generated from selling one more unit of a product or service. This is vital for companies aiming to optimize their sales strategies, as it assists them in gauging whether increasing sales volume translates to higher profits.

In our exercise, we see that each unit produced by the additional worker sells for $2. Therefore, the marginal revenue derived from the extra 50 units is $100. This calculation shows us exactly how much more income is brought in by this additional production.

Understanding marginal revenue helps businesses align their production and marketing strategies. With this insight, they can decide whether producing additional units or scaling back production can yield better financial outcomes.

Cost-Benefit Analysis

Cost-Benefit Analysis is a decision-making process used to evaluate whether the benefits of a certain action outweigh its costs. It is a tool often used by businesses to make informed choices by comparing the total expected cost vs. total expected benefits of one or more actions.

In the context of our exercise, a cost-benefit analysis involves weighing the cost of paying an additional worker, which amounts to $150, against the revenue generated from this extra production, which is $100. By comparing these figures, it becomes evident that the costs surpass the benefits, indicating a financial loss if this additional worker is hired.

This method of analysis not only guides business decisions but also aids in understanding the potential profitability of various operational strategies. It’s a tool for ensuring resources are allocated efficiently, maximizing potential gains while minimizing unnecessary expenditures.