Computing effect on firm optimal output

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Reference no: EM1316737

Making dresses is a labour-intensive process. Indeed, the production function of a dress-making firm is well described by the equation Q = L - L²/800, where Q denotes the number of dresses per week and L is the number of labour-hours per week. The firm's additional cost of hiring an extra hour of labour is about $ 20 per hour (wage plus fringe benefits). The firm faces the fixed selling price, P = $40.

a. How much labour should the firm employ? What are its resulting output and profit?

b. Over the next two years, labour costs are expected to be unchanged, but dress prices are expected to increase to $50. What effect will this have on the form's optimal output? Explain. Suppose instead that inflation is expected to increase the firms' labour cost and output price by identical (percentage) amounts. What effect would this have on the firm's output?

c. Finally, suppose once again that MC_L = $20 and P = $50 but that labour productivity (i.e., output per labour-hour) is expected to increase by 25% over the next 5 years. What effect would this have on the firm's optimal output? Explain.

Reference no: EM1316737

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