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Author Question: Explain why funds available to pay the fixed inputs are equal to the area of the triangle below the ... (Read 91 times)

fbq8i

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on: Jun 30, 2018
Explain why funds available to pay the fixed inputs are equal to the area of the triangle below the value of marginal product of labor (VMP) and above the wage.

Question 2

Entry of new firms causes
 A) accounting profits to go to zero.
  B) market share to grown.
  C) economic profits to go to zero.
  D) total revenue to be maximized.


rnehls

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Reply #1 on: Jun 30, 2018
Answer to Question 1

The intersection of the VMP and the wage determines the number of workers to be hired. Hence the rectangular area bound by the wage and the number of workers employed at that wage rate give the firm's expenditure on its variable input, i.e. labor. The triangular area above the wage line and below the VMP is therefore the funds that the firm has left to use on its fixed inputs.

Answer to Question 2

C


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