Question

Cindy is a baker and runs a large cupcake shop.

She has already hired 11 employees and is thinking of hiring a 12th.

Cindy estimates that a 12th 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 12th worker? LO14.2

A. Yes

B. No

C. You need more information to figure this out

Answer 1

Answer:

The answer is A. Yes, Cindy should hire 12th worker.

Explanation:

Please see the below for detailed calculations and explanations:

By increasing one employees, Cindy's cupcakes shop marginal cost per day will increase by the amount equals to the salary and benefit of the 12th in one day which is: $100;

The benefits brought back to Cindy's shop is the increase in marginal revenue of $150 ( calculated as $2,750 - $2,600).

As marginal revenue is higher than marginal cost in case the 12th employees is hired, Cindy should hire one more employees as it will increase her total profit at the end of the day by $50 ( i.e Marginal revenue - Marginal cost = 150 - 100 =$50).