Author Question: Suppose there are profit maximizing, competitive buyers and sellers of labor in an industry, and the ... (Read 42 times)

Evvie72 · **on:** Jul 1, 2018

Suppose there are profit maximizing, competitive buyers and sellers of labor in an industry, and the amount of capital is fixed for each firm. Explain under what condition the output price will equal the wage rate.

What will be an ideal response?

Question 2

If a firm hires one worker and eliminates four units of capital, and hires one more worker and replaces three more units of capital, keeping output constant, then

A) workers and capital are perfect substitutes.
B) the firm is operating inefficiently because capital is more efficient than workers.
C) the firm is experiencing a diminishing marginal rate of technical substitution.
D) there are decreasing returns to scale.

peter · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

The profit-maximizing buyer of labor sets the output price equal to the marginal cost of producing an additional unit of output. The marginal cost of output when capital is fixed equals the wage rate divided by the marginal product of labor. If the marginal product of labor equals one, then the output price will equal the wage rate.

Answer to Question 2

C