6. Suppose the hourly wage is $40, the price of each unit of capital is $50, and the price of output is $100 per unit. Assume that the firm cannot affect any of these prices. The production function of the firm is f(E,K) = JE× K, so that the marginal product of labor is JK MPE 2VE a. If the current capital stock is fixed at 1,600 units, how many hours of labor should the firm hire in the short run (i.e., what should E be)? b. Set up the profit function. How much profit will the firm earn? c. Now suppose that the price of labor increases to $50/hour. Find the new optimal level of employment. We remain in the short term, so the level of capital remains fixed. d. What is the short run elasticity of labor demand? Is labor demand elastic or inelastic?

6. Suppose the hourly wage is $40, the price of each unit of capital is $50, and the price of output is $100 per unit. Assume that the firm cannot affect any of these prices. The production function of the firm is f(E,K) = JE× K, so that the marginal product of labor is JK MPE 2VE a. If the current capital stock is fixed at 1,600 units, how many hours of labor should the firm hire in the short run (i.e., what should E be)? b. Set up the profit function. How much profit will the firm earn? c. Now suppose that the price of labor increases to $50/hour. Find the new optimal level of employment. We remain in the short term, so the level of capital remains fixed. d. What is the short run elasticity of labor demand? Is labor demand elastic or inelastic?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter10: Cost Functions

Section: Chapter Questions

Problem 10.9P

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