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Solve: Maximum Level of Output

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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?

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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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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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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