Suppose that you have estimated the following output function where L is labor and K is capital:
Y = 2K1/4L1/4
You know that the current price of labor is $10 and capital cost is $1 per per machine (capital).
You currently use 81 units (machines) of capital. The price of the output is $40
Given a fixed level of capital (K=81), and a price of $40 per unit of output (output is represented by Y), how many employees (L) will you hire to maximize profit? This requires a calculation.
Given a fixed level of capital (K=81), and a price of $40 per unit of output, what is the level of output you will produce? This requires a calculation.
Calculate the profit given the optimal number of employee given the answer in #2a.
At What number of employees would you maximize output but not lose money? This requires a calculation.
If the Wage Rate Rose to $12.50, what would be the possible outcomes to L, P, and Profit?
USE ACCURATE OUTPUT FUNCTION Y = 2K1/4L1/4
