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Solve: Maximum Level of Output

The table below presents estimates of the maximum levels of output possible with various combination of two inputs.

Capital (K)
5 11 25 37 47 51
4 10 23 33 41 44
3 8 18 25 30 34
2 5 11 16 20 22
1 1 4 8 10 11
1 2 3 4 5
Labor (L)

Assume that a unit of output sells for $2 and that the firm currently employs two units of capital (K = 2).:

(i) What is the marginal product of labor when L = 4?

(ii) What is the average product of labor when L = 4?

(iii) What is the marginal revenue product of labor when L = 4?

(iv) If the wage rate of labor is $10, how many units of labor should the firm hire and how many units of output should it produce?

Solution Preview

Please refer to the attached file for better clarity of tables and the rest of the solution.

(i) What is the marginal product of labor when L = 4?
Total output for K=2 and L=3 is 16 units
Total output for K=2 and L=4 is 20 units
Marginal Product of Labor when K=4 is given by
MPL=change in output/Change in labor=(20-16)/(4-3)=4 units

(ii) What is the average product ...

Solution Summary

This solution describes the steps to calculate average product, marginal product and marginal revenue product at a given combination of labor and capital. It also determines the number of units of labor that it should hire for a given level of wage rate and capital employed. A Word document is also attached as part of the solution.

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