Suppose the price of each unit of labor is $25 and the price of each unit of cap

Question

Suppose the price of each unit of labor is $25 and the price of each unit of capital is $100. The firm’s total costs are $10,000 and it is producing 30 units of output.

a. In the long run, if the firm hires 64 units of capital, how much labor is being hired?

b. What’s the firm’s average cost per unit?

c. If the price of labor increases to $30 while the price of capital remains unchanged, the firm should __________________ [increase/decrease/keep the same] amount of labor and __________________ [increase/decrease/keep the same] amount of capital if it wants to maintain production at 30 units and be economically efficient.

Explanation / Answer

a. At optimum:

Price of labor / Price of capital = Units of labor / Units of capital

25 / 100 = Units of labor / 64

Units of labor = (25 X 64) / 100 = 1600/100 = 16 units

b. Total cost = fixed cost + variable cost = $ 10,000 + [25X16 + 100X64] = $ 10,000 + [400 + 6400]

Total cost = $ 16,800

Average total cost = TC / Q = 16,800/30 = $ 560

c. decrease, keep the same

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