Profit Maximization: Analyzing Marginal Revenue Product and Marginal Factor Cost

What should Ajax do based on the given data regarding the Marginal Revenue Product and Marginal Factor Cost?

Ajax should continue to hire more workers until the marginal revenue product equals the marginal factor cost, as each new worker hired increases profits as long as their contribution exceeds their cost.

Final answer:

Ajax is in a profitable scenario where their Marginal Revenue Product exceeds their Marginal Factor Cost. Ajax should continue hiring workers until the two values are equal, as profit maximization occurs at this point where cost and revenue intersect. If marginal cost surpasses marginal revenue, profitability decreases.

Explanation:

The subject of your question involves the business concept of profit optimization. Specifically, you are curious about what action Ajax should take upon discovering that their Marginal Revenue Product (MRP), generated by the last worker hired, was $125 while the Marginal Factor Cost (MFC) was $85. The information available suggests that Ajax is earning more from the last worker than what they have paid for their services. In such a case, Ajax should continue hiring workers until the MRP equals the MFC, which is the rule followed by any profit-maximizing firm.

For better understanding, let's create a comparable example. A farmer increases his output production from 60 to 70. The marginal revenue from this increase in production exceeds the marginal cost, hence profits rise. The farmer, motivated by increased profits, continues to increase production. However, at an output level reaching 80, marginal cost equals marginal revenue, hence profit levels out. If the farmer experiments further and increases production from 80 to 90, the marginal cost outweighs the marginal revenue, thus profits decline. Applying this to Ajax's situation, the rule of thumb is to continue increasing production as long as the marginal cost is less than the marginal revenue.