A price-taking firm has total fixed costs of $40 and faces a market-determined p
ID: 1177722 • Letter: A
Question
A price-taking firm has total fixed costs of $40 and faces a market-determined price of $2 per unit of its output. The wage rate is $11 per unit of labor. Labor is the only variable input. Complete the following table and then answer the questions that follow.
a) How much labor should management hire to maximize profit?
b) How much output should management produce to maximize profit?
c) Does it matter whether management chooses labor input or units of output to maximize profit? Why?
d) How must labor should the manager hire if the wage rate rises to $15 per unit?
Explanation / Answer
Units of Labor
1
2
3
4
5
6
7
8
9
10
=====================================================================================================================================================
Output
5
15
30
50
65
77
86
94
98
96
=====================================================================================================================================================
Marginal
Product
Marginal
Revenue
Product
Marginal Cost
Profit
Answer:
Output
Margina
l
Product
Total
revenu
e
1
2
5
15
5
10
10
30
Margina
l
Revenu
e
Product
10
20
3
30
15
60
4
50
20
5
65
6
Units
of
Labor
total
fixed
cost
total
variabl
e cost
Total
cost
Marginal
Cost
40
40
11
22
51
62
30
40
33
73
100
40
40
44
84
15
130
30
40
55
95
77
12
154
24
40
66
106
7
86
9
172
18
40
77
117
8
9
10
94
98
96
8
4
-2
188
196
192
16
8
-4
40
40
40
88
99
110
128
139
150
10.2
1.1
0.7333333
3
0.55
0.7333333
3
0.9166666
7
1.2222222
2
1.375
2.75
-5.5
=====================================================================================================================================================
How much labor should management hire to maximize profit?
Answer:
Profit
-41
-32
-13
16
35
48
55
60
57
42
=====================================================================================================================================================
Profit would be maximized when labors are hired such that Marginal revenue product becomes
equal to wage rate
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