Answer to Question #228132 in Economics of Enterprise for senu

Question

Suppose that a firm produces at an output level where the MPL is 50 units and the wage rate is Rs.25 (W).Suppose further that the MPK is 100 units and the rental price of land is Rs.40.

Q 1= is the firm producing efficiently?

Q 2 = If the firm is n producing?

Efficiently, how might it do so?

What is the MPL and MPK based on the input rates specified?

If the rental price of the land was Rs.20 for unit what was the wage rate?

Suppose that the rental price of capital is expected to increase to Rs.25 while the wage rate and the labour input will remain unchanged under the terms of labour contract. If the firm maintains efficient production, what input rate of land will be used?

Answer 1

Q1

According to the first case, The firm is producing efficiently because the marginal productivity of labor is higher than the wage rate. For a firm to maximize profit, the marginal productivity of labor should be equal to or more than the wage rate.

Q2

The MPK of 100 units and rental price of land of Rs. 40 indicates that there is a compromise on the efficiency of the firm. According to Neoclassical theory, firms make more investments and produce more if the rental price is greater than the cost of capital and they make less investments if rental price is less than the cost of capital.

$MPL=50$

$MPK=100$

Q3

If the rental price of the land was Rs. 20, the wage rate would be doubled from Rs. 25 to Rs. 50 to maximize the level of productivity and profitability.

Q4

If the firm is to maintain efficient production, input rate of land to be used should be increased by Rs. 5 if the rental price of capital is increased to Rs. 25. Rental price of capital and input rate of land are positively correlated.