Answer to Question #73902 in Microeconomics for Zulfiqar Ali

Question

The marginal product of labor function for International Trading Inc. is given by the equation: MPL(sub-L) = 10 *(K^0.5/L^0.5)

Currently, the firm is using 100 units of capital and 121 units of labor. Given the very specialized nature of the capital equipment, it takes six to nine months to increase the capital stock, but the rate of labor input can be varied daily. If the price of labor is $10 per unit and the price of output is $2 per unit, is the firm operating efficiently in the short run? If not, explain why, and determine the optimal rate of labor input.

Answer 1

Firstly, we need get MPL, that`s why MPL = 10*(10/11) = 9.1, and so we see that MPL < $10 (price of labor), that`s why International Trading Inc. isn`t operating efficiently in the short run, because cost of labor is more than revenue of product. The optimal level of labor costs is lower than 9.1, then the firm will be able to receive profits from production.