In terms of the marginal product of labor, how much labor is needed to produce one more unit of output? If the cost of that labor is w, then how much does one more unit of output cost to produce? If a firm is a perfectly competitive profit maximizer, show why they produce where w equals the marginal revenue product of labor.

What will be an ideal response?


The reciprocal of the marginal product of labor is required to produce one more unit of output. Hence, one more unit of output costs w times the reciprocal of the marginal product of labor. Since the firm is perfectly competitive, they are a price taker and their marginal revenue is simply the price of their good (P). In order to maximize profits, they set P=MC. But, as just mentioned the cost of producing one more unit (MC) is w times the reciprocal of the marginal product of labor. Cross multiplying equates w with the marginal revenue product.

Economics

You might also like to view...

An article in the Wall Street Journal reports that “most cable TV operators are aware that cable is price sensitive, and there comes a point where people won’t pay the price.” Which demand curve in Figure 6-6 best illustrates this situation?

A. 1 B. 2 C. 3 D. 4

Economics

"Insider trading" laws are meant to prevent

A) the executives of a corporation from holding a majority of its outstanding shares. B) buying or selling shares based on information not available to the public. C) foreign investors from gaining controlling interest in U.S. corporations. D) the issuing of bonds for the purpose of buying stock.

Economics

If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro?

A) 1% B) -1% C) 9% D) -9%

Economics

Planned investment is the:

A. spending households engage in based on forecasted budget. B. amount that firms decide to allocate to inventory accumulation. C. investment that a firm decides upon as a result of temporary market changes. D. amount that firms decide to allocate to new capital resources and inventory accumulation.

Economics