2) It is the holiday season, and a firm intends to temporarily open a plant to p

Question

2) It is the holiday season, and a firm intends to temporarily open a plant to produce red plastic reindeer noses for the next six weeks. The nasal production technology is Q-2400 VIL, where Q is the quantity of noses and L the level of employment. Each nose sells on a competitive market for P $4. ( a) How many workers does the firm emplo y if, over the period, the competitive wage is W= $600 and both the firing and hiring costs are zero? (b) Now suppose the government enacts job security provisions that result in the firm bearing a firing cost of cF- $100 per worker when it closes the plant at the end of the season. Assuming the wage over this period is now lower at W= $300, how many workers does it now employ?

Explanation / Answer

Q=2400L and P=$4

Competitive wage =$600

We know in competitive set up MPL=w/p

Therefore MPL=600/4=150

Hence,2400*1/2*L-1/2=150 or, L-1/2=150/1200 or,L1/2=8 or, L=64

2nd part:

CF=$100 and w=$300

MPL=w+CF/p

2400*1/2*L-1/2=400/4 or, L-1/2=100/1200 or,L=144

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