Calculation of labor, output and profit using the given data.
Making dresses is a labor-intensive process. The production function of a dress making firm is described by the equation Q = L - L2/800. Where Q denotes the number of dresses per week and L is the number of labor hours per week. The firms additional cost of hiring an extra hour of labor is about $20 per hour (wage plus fringe benefits). The firm faces the fixed selling price, P=$40.
a) Explain how much labor should the firm employ also elucidate what are its resulting output and profit?
b) Over the next two years labor costs are expected to be unchanged. But dress prices are expected to increase to $50. What effect will this have on the firms optimal output? Explain. Suppose instead, that inflation is expected to increase the firms labor cost and output price by identical (percentage) amounts. What effect will this have on the firms output?
c) Suppose once again that MCL = $20 and P =$50 but labor productivity (output per labor hour) is expected to increase by 25% over the next five years. What effect would this have on the firms optimal output? Explain.