5. Suppose that a firm is producing in the short run with output given by: Q = 10L – 0.25L 2 , where L is the labour input. The firm hires labour at wage of €16 per hour and sells the good in a competitive market at P = €8 per unit. a) Determine the firm’s marginal product of labour. b) Find the firm’s optimal use of labour, the associated level of output and the marginal product of labour at this employment level. Explain the meaning of the latter. c) Management of the firm has carefully measured output elasticity in the past three years and has determined that it is 1.2. What sort of returns to scale does the firm face? Interpret this number in one sentence.
5. Suppose that a firm is producing in the short run with output given by: Q = 10L – 0.25L 2 , where L is the labour input. The firm hires labour at wage of €16 per hour and sells the good in a competitive market at P = €8 per unit. a) Determine the firm’s marginal product of labour. b) Find the firm’s optimal use of labour, the associated level of output and the marginal product of labour at this employment level. Explain the meaning of the latter. c) Management of the firm has carefully measured output elasticity in the past three years and has determined that it is 1.2. What sort of returns to scale does the firm face? Interpret this number in one sentence.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
5. Suppose that a firm is producing in the short run with output given by:
Q = 10L – 0.25L
2
, where L is the labour input. The firm hires labour at wage of €16
per hour and sells the good in a competitive market at P = €8 per unit.
a) Determine the firm’s marginal product of labour.
b) Find the firm’s optimal use of labour, the associated level of output and the marginal
product of labour at this employment level. Explain the meaning of the latter.
c) Management of the firm has carefully measured output elasticity in the past three years
and has determined that it is 1.2. What sort of returns to scale does the firm face?
Interpret this number in one sentence.
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