S. You have the following annual production schedule for laborens and ouput 120
ID: 1115278 • Letter: S
Question
S. You have the following annual production schedule for laborens and ouput 120 250 400 490 560 600 4 Assume that the firm is a price taker in both inputs and outputs. Laborers are paid w-S15.000 and output can be sold for P- $300 per unit. a. With which laborer does the law of diminishing returns set in? b. How many laborers would a profit-maximizing firm hire? c. Suppose that due to the current labor shortage, the wage rate in this industry rises to w $22,000. How many laborers would a profit-maximizing firm hire? a profit-maximizing tim hire?Explanation / Answer
a. Diminishing returns to labour starts to set in when marginal product of labour declines for every additional worker. This happens from the 4th unit of labour. Diminishing returns sets in then.
b. A profit maximizing firm will operate where W=VMPL, W is the wage rate and VMPL is the price times MPL. This happens at 3 units of labour. Thus a profit maxing firm will hire 3 units of labour.
c. Thus now with the increase in wages a profit maxing firm will hire 2 units of labour to remain profitable.
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