The marginal product of labor function for International Trading Inc. is given b
ID: 1117335 • Letter: T
Question
The marginal product of labor function for International Trading Inc. is given by the equation: MPL(sub-L) = 10 *(K^0.5/L^0.5)
Currently, the firm is using 100 units of capital and 121 units of labor. Given the very specialized nature of the capital equipment, it takes six to nine months to increase the capital stock, but the rate of labor input can be varied daily. If the price of labor is $10 per unit and the price of output is $2 per unit, is the firm operating efficiently in the short run? If not, explain why, and determine the optimal rate of labor input. Show work and provide complete and coherent sentences.
Explanation / Answer
K=121
L=100
MPL = 10*(121^0.5/100^0.5) = 11
Price of output=2
w=$10
for the efficient use of labor in short-run following condition should meet
MPL*P=w
But in this case MPL.P=11*2=22
and w=100
MPL*P>w
No the firm is not operating efficiently in short run. Because the price value of MPL is greater than wage of labor ,therefore more labor should be employed.
for optimal number of labor
MPL*P=w
10=MPL*2
MPL=5
10 *(K^0.5/L^0.5)=5
K=121
10*11/5 = L^0.5
L=484
Optimal number of labor employed=484
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.