L Avg Product Labor 0 --- 1 14 2 15 3 16 4 15 5 14 Consider the following short-
ID: 1242309 • Letter: L
Question
L Avg Product Labor 0 --- 1 14 2 15 3 16 4 15 5 14 Consider the following short-run production information forLumpy's Liquors, a producer of vodka, who pays a wage rate w of $2.We also know that each additional uniot of L costs Lumpy $2. Giventhat Lumpy is rational, how much extra revenus must a uniot oflabor generate for him to want to hire that unit of labor? IF theprice of output is represented by Px, write down a generalmathematical expression for the extra revenus generated for Lumpyby using an extra unit of L. L Avg Product Labor 0 --- 1 14 2 15 3 16 4 15 5 14 Consider the following short-run production information forLumpy's Liquors, a producer of vodka, who pays a wage rate w of $2.We also know that each additional uniot of L costs Lumpy $2. Giventhat Lumpy is rational, how much extra revenus must a uniot oflabor generate for him to want to hire that unit of labor? IF theprice of output is represented by Px, write down a generalmathematical expression for the extra revenus generated for Lumpyby using an extra unit of L. L Avg Product Labor 0 --- 1 14 2 15 3 16 4 15 5 14Explanation / Answer
Basically you want the marginal product of labor to equal themarginal cost of that labor. If each unit of L costs Lumpy$2, and the wage for that unit is $2, that means the marginal costis $4. Therefore, when the marginal product of the next unitof labor = 4, then Lumpy will hire that unit. Once the MPL< 4, he'll stop. In the table you're given, you have the number ofunits/average/marginal product of labor equal to the following: 0 --- 0 1 14 14 2 15 16 3 16 18 4 15 12 5 14 10 This is because the average product of labor is the total productdivided by the number of units. The marginal product is theextra product gained from the extra unit. Therefore with 1 labor unit, the average (and total) is 14. Since you've added an incremental unit, the marginal product isalso 14. With 2 labor units, the average is 15, which means the total is30. Since the prior total was 14, then the marginal productis 16. With 3 labor units, the average is 16, which means the total is48. Since the prior total was 30, then the marginal productis 18. With 4 labor units, the average is 15, which means the total is60. Since the prior total was 48, then the marginal productis 12. With 5 labor units, the average is 14, which means the total is70. Since the prior total was 60, then the marginal productis 10. Revenue = amount sold x Price. Therefore if the price of output is Px, then Revenue = nPx, where nis the number of bottles of vodka produced. The extrarevenues generated from an extra unit of L is the marginal productof labor of the L'th unit (that is, the n units produced by thatworker, which we'll call ML) multiplied by the price ofthe output (Px). Therefore marginal revenue = (ML)(Px). It should be noted that the NET revenue of theL'th worker is marginal revenue - marginal cost, or (ML)(Px) -(CL)(w) or (ML)(Px) - (2)(2) or (ML)(Px) - 4Related Questions
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