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Using a non-numerical example, explain how firms should decide how many employees to hire. Your example should be original not one from the textbook or my lecture. Make sure response explains how optimal firm behavior will lead to scale and substitution effects. Also explain the importance of the diminishing marginal returns assumption. 

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019

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Related questions

labor supply is NS = 10 + 2w Labor Demand is: ND = 170 - 2N It should be ND = 170 - 2N. Plus, the market is at equilibrium already when w = 40.

Suppose the labor supply for a firm is given by:

NS = 10 + 2w

and REAL Labor Demand is given by:

ND = 170 - 2N


Currently the real wage is 40 units of output.

a)(5 points) How many workers will the firm hire at a real wage equal to 40.


b)(5 point) How many workers are willing to work at a real wage of 40?


c)(5 points) Is the labor market clearing and if not, is there pressure for wages to go up or down? Explain.


d)(5 points) Now solve for the market clearing real wage.


e) (15 points) Explain exactly how this labor market will clear....wages will not stay at 40....explain the adjustment to equilibrium.... why would firms change their behavior and why would workers change their behavior? You need to be very specific using the law of diminishing returns and the substitution effect in labor supply in you explanation.


NOW DRAW A LABOR MARKET DIAGRAM LABELING AS POINTS A, THE NUMBER OF PEOPLE HIRED AT w = 40 AND THE NUMBER OF PEOPLE WILLING TO WORK AT w = 40. LABEL THE LABOR MARKET CLEARING POINT AS POINT B.


10 POINTS FOR CORRECT AND COMPLETELY LABELED GRAPH

f) (5 points) How many people are involuntarily unemployed at w = 40 and what do wwe mean by involuntarily unemployed?

Medfin Accounting Company (MAC) specializes in providing accounting and tax services for medical establishments and professionals. Presently, the company's production method is highly labor-intensive because many of the bookkeeping tasks are done manually. MAC employs 50 workers (L) paying them each, on average, $50,000 per year. MAC also has 40 computers (K). The company has leased these computers along with their accompanying software packages at $5,000 per year each. Presently the firm provides accounting and tax services to 150 clients.

A. Write the equation for the company's isocost.

B. At this given mix of inputs ( K = 40, L= 50) the firm's marginal rate of technical substitution (MPL/MPK) is -6. Is this mix of capital and labor that MAC is using efficient (optimal)? Explain as specifically as you can.

C. If your answer to (b) is no, what changes should the firm make in its production style?

D. Assuming that the firm wants to serve the same number of clients, how would the changes that you might be suggesting affect the company's revenue, costs, and profit?

E. Now starting back from the original mix of computers (capital) and labor that is 50 workers and 40 computers, suppose the company wants to increase the size of its clientele. How would you suggest the company should pursue its expansion plan? What is the most efficient approach to this expansion? Should the company hire more labor and acquire more computers right away? Be as specific as you can.

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.


Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

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