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labor-product market eqm example

labor-product market eqm example - K = 5 L Q ATC 1 4 7/4 2...

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A firm with one unit of capital has a MPL = 5 – L Capital costs K, the wage is 2. 1. If this firm sells its output for p, how much labor will it hire? Hire L until VMPL = W or p(5-L) = 2 5p – 2 = pL or L = (5p – 2)/p 2. Write a table giving the firm’s average total costs if it hires 1,2,3 or 4 units of labor L Q ATC 1 4 (2+K)/4 2 7 (4+K)/7 3 9 (6+K)/9 4 10 (8+K)/10
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3. If this firm is in a competitive product market how much will it produce and what will be the equilibrium price of the product if K=2? What if K=5? What are the two key concepts here? K = 2 L Q ATC 1 4 4/4 2 7 6/7 3 9 8/9 4 10 10/10 Minimum ATC is at L=2, Q=7 In a competitive market, p = min of ATC = 6/7
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Unformatted text preview: K = 5 L Q ATC 1 4 7/4 2 7 9/7 3 9 11/9 4 10 13/10 Minimum ATC is at L=3, Q=9 In a competitive market, p = min of ATC = 11/9 NOTE: Could get p using VMPL = W or p(5-L) = 2 This gives a different answer, why? 4. Say K = 5. If I told you the demand curve for this product was Q = 200 – 90p, what else could you tell me about the market? We already know price, and q for each firm. What don’t we know? Total Q and the total number of firms, we need demand to tell us that. Q = 200 – 90 (11/9) = 200 – 110 = 90 So there must be 10 firms in the market...
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