Consider a price-taking firm that has total fixed cost of $50 and faces a marketdetermined price of $2 per unit for its output.

Consider a price-taking firm that has total fixed cost of $50 and faces a marketdetermined price of $2 per unit for its output. The wage rate is $10 per unit of labor, the only variable input. Using the following table, answer the questions below.
(1) (2) (3) (4) (5) (6) Units of Marginal Marginal Marginal labor Output product revenue product cost Profit 1 5 2 15 3 30 4 50 5 65 6 77 7 86 8 94 9 98 10 96
a. Fill in the blanks in column 3 of the table by computing the marginal product of labor for each level of labor usage.

b. Fill in the blanks in column 4 of the table by computing the marginal revenue product for each level of labor usage.

c. How much labor should the manager hire to maximize profit? Why?

d. Fill in the blanks in column 5 of the table by computing marginal cost.

e. How many units of output should the manager produce to maximize profit? Why?

f. Fill in the blanks in column 6 with the profit earned at each level of labor usage.

Expert Solution

a.MP=∆Output/ ∆units of labor

b. Marginal revenue product= Marginal product*price= 2*MP

c. Manager should hire 8 units of labor. As beyond this level marginal cost is greater than marginal revenue of product. So it is not beneficial to hire more workers.

d. MC= Wage rate=$10

e. Manager will produce 94 units of output. As profit is maximum at this level. Also, the units of labor is 8.

f. Profit= TR-TC= P*Q-(TFC-TVC)=2*Q-(50-10*L)

Rahul Sunny answered 2 years ago

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