Labor Economics
7th Edition
ISBN: 9780078021886
Author: George J Borjas
Publisher: McGraw-Hill Education
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Question
Chapter 3, Problem 1RQ
To determine
Explain the strategy of a firm to maximize his or her profit.
Expert Solution & Answer
Explanation of Solution
A profit maximizing firm will hire the employers at the point where the wage of the labor is equal to the value of marginal product. This is because the marginal product is the price of the product that a firm will earn through the sales of a product. If the firm gives the wages to the labor (is the firms cost of production) is less than his earning, he will attain a profit and he will not get any benefit or profit when the cost of production is greater than the gain.
This same idea is used by the firm in his output setting. A firm will set its level of output at the point where output price (MR) equal to its marginal cost.
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Students have asked these similar questions
Why does a profit-maximizing firm hire workers up to the point where the wage equals the value of marginal product? Show that this condition is identical to the one that requires a profit-maximizing firm to produce the level of output where the price of the output equals the marginal cost of production.
Suppose the firm only produces good X and that the price of good Y, a substitutegood, decreases. What will happen to the optimal quantity of labor the firm willhire? Explain.
Widget factory Inc. in Wisconsin has the following production function: F(L,K)=2L
L represents the number of labours hours. Workers at this factory are paid an hourly wage of $30 and they rent capital at$25/ hour.since this is a competitive market, the factory output is $50 per unit.
Let's pretend the firm operates in the short run with capital fixed at 900, how many workers would widget factory Inc employ? What is their profit rate?
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