In the short run, labor is the only variable factor used by a firm in the produc
ID: 1093603 • Letter: I
Question
In the short run, labor is the only variable factor used by a firm in the production of a certain product. The manager of the firm has estimated that the marginal product of labor is given by MPL = 160/sqrt(L). The wage per unit of labor is w = $24, and each unit of output can be sold at a constant price P. The firm is maximizing profits by employing L = 100. Based on this information..
A the price of each unit of output is P = $1.5.
B the firm will increase L if w increases
C the law of diminishing returns does not hold
D none of the above.
the law of diminishing returns does not hold
none of the above.
the law of diminishing returns does not hold
none of the above.
Explanation / Answer
VMPL = P x MPL
WHERE MPL = 160 , L = 100 AND P = CONSTANT
A profit maximizing firm chooses the quantity of labor so that
the value of the marginal product (P x MPL) is equal to the
wage (W):
P x MPL = W
Divide both sides by MPL to get:
P = W / MPL
P = 24 / 160 = 0.15