Question

Cindy is a baker and runs a large cupcake shop. She has already hired 11 employees and is thinking of hiring a 12 th. Cindy estimates that a 12 th worker would cost her \(\$ 100\) per day in wages and benefits while increasing her total revenue from \(\$ 2,600\) per day to \(\$ 2,750\) per day. Should Cindy hire a 12 th worker? a. Yes. b. No. c. You need more information to figure this out.

Short answer

a. Yes.

Step-by-step solution

Calculate Additional Revenue

First, we need to understand how much additional revenue the 12th worker would generate. Cindy's total revenue would increase from \(\\(2,600\) to \(\\)2,750\). Therefore, the additional revenue generated by hiring the 12th worker is \(\\(2,750 - \\)2,600 = \$150\).

Compare Additional Revenue with Additional Cost

Now, compare the additional revenue from hiring the 12th worker (\(\\(150\)) with the additional cost of the worker's wages and benefits (\(\\)100\)). Since the revenue increase (\(\\(150\)) is greater than the cost (\(\\)100\)), it is financially beneficial for Cindy to hire the 12th worker.

Decision Making

Based on the comparison in Step 2, since the additional revenue exceeds the additional cost, Cindy should hire the 12th worker.

Key concepts

Cost-Benefit Analysis

Cost-benefit analysis is a systematic approach used to evaluate the financial implications of a decision by comparing the costs required with the benefits gained from a particular action. In Cindy’s scenario, the cost-benefit analysis involves assessing whether the benefits of hiring a 12th worker outweigh the costs.

### Understanding Costs and Benefits

• Costs: Cindy will incur an additional daily cost of \( \\(100 \) for the new worker's wages and benefits.
• Benefits: The projected increase in daily revenue is \( \\)150 \) by hiring the 12th worker.

By calculating the difference between the additional revenue and the additional cost, Cindy is able to make an informed decision. Since \( \\(150 - \\)100 = \\(50 \), the net benefit of \( \\)50 \) per day makes it a profitable choice for Cindy to make this hire.

Cost-benefit analysis helps business owners like Cindy make decisions that maximize profits while minimizing unnecessary expenses. This process ensures resources are allocated efficiently and investments yield a positive return.

Labor Economics

Labor economics focuses on understanding the dynamics of labor markets, labor relations, and employment decisions. With Cindy’s consideration of hiring another employee, several aspects of labor economics come into play.

### Evaluating the Marginal Product of Labor
In essence, labor economics uses concepts like the marginal product of labor, which measures the additional output gained from hiring one more worker. If Cindy hires a 12th worker, she expects to increase her daily revenue from \( \\(2,600 \) to \( \\)2,750 \), indicating that this worker’s marginal contribution is valued at \( \\(150 \) a day.

### Balancing Labor Costs and Output Gains
Cindy must weigh these output gains against the wages and benefits she has to pay. Only when the marginal product of labor exceeds the cost of hiring, it makes economic sense to hire more workers. In Cindy's case, since the additional revenue is \( \\)150 \) compared to the cost of \( \$100 \), hiring another worker is beneficial.

Labor economics provides valuable insights into understanding how labor supply and demand influence wages, employment rates, and industrial productivity, helping business owners like Cindy make informed employment decisions.

Business Decision Making

Business decision making involves selecting the best course of action from various alternatives, often under conditions of uncertainty. Cindy’s decision to hire a new worker exemplifies this process within a business environment.

### Making Data-Driven Decisions
Cindy utilizes data-driven approaches by evaluating the estimated costs and benefits, thereby reducing uncertainty about the financial impact of hiring another employee. These calculations form the basis of rational decision making, ensuring that Cindy’s business grows sustainably.

### Strategic Resource Allocation
Effective decision making requires careful resource allocation. By deciding to hire another worker, Cindy strategically invests in human resources to increase productivity and revenue. This decision shows how business owners must continuously assess their operations to remain competitive.

Through prudent evaluation and strategic planning, businesses can thrive. Cindy’s analysis indicates how examining additional revenue against costs leads to optimal business decisions that enhance profitability.