In the short run, a particular type of skilled labor is the only variable factor used by a firm. The manager of the firm has estimated that the marginal product of labor is given by MPL = a - b L, where a and b are numbers to be specified below. The hourly wage is w, and each unit of output can be sold in a competitive market at a market price P. If w = $78, P = $25, a = 50, b = 2, and the firm is employing L = 22, then based on this information
- The firm is using the optimal (profit-maximizing) amount of labor
- The firm can increase its profits by reducing the amount of labor used
- The firm can increase its profits by increasing the amount of labor used
- The law of diminishing returns does not hold