1. If an industry is producing a price inelastic product, will its labor demand
ID: 1151114 • Letter: 1
Question
1. If an industry is producing a price inelastic product, will its labor demand curve most likely be wage elastic or wage inelastic?
(b) A firm makes a product using labor and capital. The wage rate is $20 an hour, and the cost of capital is $40 an hour. If the marginal product of capital is 80 units and hour, what must be the marginal product of labor, if the firm is maximizing profit?
(c) A profit maximizing firm’s marginal revenue product of labor is $250 a day. If the wage rate is $ 200 a day, will this firm hire more workers or lay off workers?
Explanation / Answer
If the Firm is maximising the profit then below condition should met
MPL/MPK=w/r
MPK=80 ,w=20 & r=40
MPL/80=20/40
MPL=40
Ans for c)
Marginal Revenue should be equal to Marginal Cost
MR=$250 and MC (L)=w=200
As MC is lower than Marginal Revenue Firm can hire more workers till the point when MR=MC
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