4 Suppose the hourly wage is $20, the price of each unit of capital is $25, and

Question

4 Suppose the hourly wage is $20, the price of each unit of capital is $25, and the price o output is $50 per unit. Assume that the firm cannot affect any of these prices. Th production function of the firm is so that the marginal product of labor is a If the current capital stock is fixed at 1,600 units, how many hours of If the current capital stock is fixed at 1,600 units, how many hours of labor should th firm hire in the short run (i.e., what should L be)? How much profit will the firm earn hint: remember that profit is just pricexoutput- wagexL-price of capitalx K)? (3 poin total: 2 for the value of L and 1 for the profit).

Explanation / Answer

SHORT RUN SCENARIO

4. (a) Given: Current capital stock is fixed at 1,600 units.

To be found: Hours of labour to be hired AND Amount of profit.

Per hour labour rate is given to be $20.
rate * hours = output
20* hours = 1600
hours = 1600/20
hours = 80
L = 80 hours
Therefore, Hours of labour to be hired is 80 hours.

Now,Let profit of the firm be denoted by the letter "P"

P = price *output - wage *L - price of capital *k
P = 50 * 1600 - 20 *1600 - 25 *1600
P= 80,000 - 32,000 - 40000
P = 8,000
Therefore, profit is $ 8,000

LONG RUN SCENARIO
4 (b)

MPL refers to Marginal Product of Labour. It is defined as a change in output due to one unit additional change in the labour.
MPK refers to Marginal product of Capital. it is defined as the change in output due to introduction of one unit of capital (say a dollar $).
For profit maximization, the optimal or maximum possible ocmbination of both the inputs i.e. Labour and Capital are utilised by the firm.
In profit maximisation, MPL / PL = MPK / PK
The relationship is as follows:
MPL / MPK = PK   / PL

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