A firm wants to maximize its profit. What info about the production of a firm is...

A firm wants to maximize its profit. What info about the production of a firm is needed when trying to determine the optimal amount of labor (N*)it should employ? Explain how that info can help a firm determine their optimal amount of labor.

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Expert Solution

The firm tried to increase the production by using both capital and labour. The substitution between these two factors will determine the production level of each firm. The marginal rate of technical substitution substitution between these two inputs should be equal to the ratio of wage rate to rental capital rate. The particular level which the number of labours equate the certain wage rate, then the firms will use this combination of wage rate and workers in the firm. This given number of labours will give higher level of output and profit. The wage rate is determined using the marginal productivity of each of the workers in the firms. The wage rate will be given on the basis of the productivity of the labour.

Using this optimal level of output and the given level of capital and technology the firm will increase the level of profit and revenue. These highly productive workers were reducing the variable cost of the firms also. The firms tried to increase the level of hiring more workers with high level of skill to the market to raise the level of production. This hiring was strictly based on the productivity and exogenously determined wage rate.

Rahul Sunny answered 1 year ago

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