In the short run, labor is the only variable factor used by a firm. The manager
ID: 1158702 • Letter: I
Question
In the short run, labor is the only variable factor used by a firm. The manager of the firm has estimated that the marginal product of labor is given by MPL = B/ (L+a)0.5 (that is, the denominator of MPL is the square root of L+a), where B and a are positive numbers. The hourly wage is w no matter how many units of L are used, and each unit of output can be sold in a competitive market at a market price P.
If w=$50, P=$7, B=40, a=4, and the firm is employing L=45, then based on this information
A)The firm is using the optimal (profit-maximizing) amount of labor.
B)The firm can increase its profits by reducing the amount of labor used.
C)The firm can increase its profits by increasing the amount of labor used.
D)The law of diminishing returns does not hold.
A)The firm is using the optimal (profit-maximizing) amount of labor.
B)The firm can increase its profits by reducing the amount of labor used.
C)The firm can increase its profits by increasing the amount of labor used.
D)The law of diminishing returns does not hold.
Explanation / Answer
If L=45 then MPL=40/(45+4)^0.5=40/7=5.71
This MPL value should be an equilibrium value of wage to be achieved hence to increase pofit firm should reduce the amount of abour because equilibrum wage is way below given wage
Hence option B is correct response