8. Consider a representative firm that faces a constant returns to scale production function Y = zF(K, Nd), where Y is output of consumption goods, z is TFP, K is physical capital, and Nd is labour input. The amount of capital is assumed to be given and fixed. The production function exhibits a positive marginal product of labour, as well as diminishing returns to labour. The firm seeks to maximize profits. (a) Explain what the profit maximizing condition for the firm is and show the profit maximizing labor demand on the graph with total revenue and total variable cost curves. On another graph show the firm's demand for labour curve and the profit maximizing labor input. (b) Suppose that the government now imposes an output tax Ty < 1 per unit of con- sumption good produced. What is the effect of this tax on the firm's demand for labor? Explain.

8. Consider a representative firm that faces a constant returns to scale production function Y = zF(K, Nd), where Y is output of consumption goods, z is TFP, K is physical capital, and Nd is labour input. The amount of capital is assumed to be given and fixed. The production function exhibits a positive marginal product of labour, as well as diminishing returns to labour. The firm seeks to maximize profits. (a) Explain what the profit maximizing condition for the firm is and show the profit maximizing labor demand on the graph with total revenue and total variable cost curves. On another graph show the firm's demand for labour curve and the profit maximizing labor input. (b) Suppose that the government now imposes an output tax Ty < 1 per unit of con- sumption good produced. What is the effect of this tax on the firm's demand for labor? Explain.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

8. Consider a representative firm that faces a constant returns to scale production function
Y = zF(K, Nd), where Y is output of consumption goods, z is TFP, K is physical
capital, and Nª is labour input. The amount of capital is assumed to be given and
fixed. The production function exhibits a positive marginal product of labour, as well as
diminishing returns to labour. The firm seeks to maximize profits.
(a) Explain what the profit maximizing condition for the firm is and show the profit
maximizing labor demand on the graph with total revenue and total variable cost
curves. On another graph show the firm's demand for labour curve and the profit
maximizing labor input.
(b) Suppose that the government now imposes an output tax Ty < 1 per unit of con-
sumption good produced. What is the effect of this tax on the firm's demand for
labor? Explain.

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