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Making dresses is a labor-intensive process.

Making dresses is a labor-intensive process. Production function Q=L-L^2/800
Q denotes # of dresses per week, L # of labor hrs per week
Additional labor $20/hr (wage plus fringe)
Fixed selling price P=$40
a. how much labor should the firm employ? What is the resulting output and profit?
b. Over the next two years, labor costs are expected be unchanged, but dress prices to increase to $50. What effect will this have on the firm’s optimal output? Explain. Suppose instead that inflation is expected to increase the firm’s labor cost and output price by identical percentage amounts. What effect would this have on the firm’s output?
c. Suppose once again that MCl=$20 and P=%50 but that labor productivity (output per labor hour) is expected to increase by 25% over the next 5 years. What effect would this have on the firm’s output?

This question was asked on May 26, 2010.

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