PROFIT-MAXIMIZING INPUT USAGE

| June 14, 2016

uestion
Consider a price-taking firm that has total fixed cost of $50 and faces a market-determined price of $2 per unit for its output. The wage rate is $10 per unit of labor, the only variable input. Using the following table, answer the questions below.

(1).

(2)

(3)

(4)

(5)

(6)

Units of
labor

Output

Marginal
product

Marginal
revenue product

Marginal
cost

Profit

1

5

_______

_______

_______

_______

2

15

_______

_______

_______

_______

3

30

_______

_______

_______

_______

4

50

_______

_______

_______

_______

5

65

_______

_______

_______

_______

6

77

_______

_______

_______

_______

7

86

_______

_______

_______

_______

8

94

_______

_______

_______

_______

9

98

_______

_______

_______

_______

10

96

_______

_______

_______

_______

a. Fill in the blanks in column 3 of the table by computing the marginal product of labor for each level of labor usage.

b. Fill in the blanks in column 4 of the table by computing the marginal revenue product for each level of labor usage.

c. How much labor should the manager hire in order to maximize profit? Why?

d. Fill in the blanks in column 5 of the table by computing marginal cost.

e. How many units of output should the manager produce in order to maximize profit? Why?

f. Fill in the blanks in column 6 with the profit earned at each level of labor usage.

g. Do your answers to partscandemaximize profit? Does it matter whether the manager chooses labor usage or chooses output in order to maximize profit? Why?

h. How much labor should the manager hire when the wage rate is $20? How much profit is earned? Is marginal product greater or less than average product at this level of labor usage? Why does it matter?

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