Purchase Solution

Implicit function theorem to maximize profit

Not what you're looking for?

Ask Custom Question

Assume that firm A produces good G using only labor. Therefore, the firm's output is a function of the quantity of labor hired (i.e. output = q(L)).

Assume further that this firm receives a price (p) for good G and pays laborers a wage (w) that are both constant, and that the firm pays a constant health care cost (h) for each worker. If total revenue is calculated as pq(L), and the total cost of paying all laborers is measured by the equation TC = (w + h)L, we have a profit function that looks like this:  = pq(L) - (w + h)L. To maximize profits, firm A must adjust L until profits are maximized at L*.

a. From the profit equation, derive an equation for the marginal product of labor (i.e. dq/dL) and then show whether dq/dL is positive or negative. Use the implicit function theorem to determine how changes in h affect L (i.e. dL/dh).
Assume that d2q/dL2 < 0.

Assume that output and price have the following values: q=3*(3rd root of L) and p = $9, and that the firm's total costs take the following form: (w + h)L = (6+h)(3rd root of L^4)

b. Given this new information, maximize the firm's profits and find L*.

Purchase this Solution

Solution Summary

Detailed steps are provided for everything. The response is very well written and easy to understand as well. Overall, an excellent response. It is an excellent response for students who want to understand the concepts and then use the same concepts to solve similar problems in the future.

Solution Preview

a) to maximize Profit = p&#61482;q(L) - (w + h)L in terms of L
first order condition: d(Profit)/dL = 0, i.e. p*dq/dL - (w+h) = 0 (1)
then we have dq/dL = (w+h)/p (1)
since w, h, p are all ...

Purchase this Solution

Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.