Busness Economics

1). The marginal product of labour in a production process is statistically estimated as

MPL = 10(K/L)0.5

Currently the process is using 100 units of K and 121 units of L. Given the

Very specialized nature of capital equipment K, it takes about a year to increase K; but the

rate of labour input, L, can be varied daily. If the wage rate is $ 10 per unit and the price

of output is $2 per unit, is the firm operating efficiently in the short run? If not, explain

why. Also determine the optimal rate of labour input. On what factors does the labour efficiency depend?

MP of L = 10(K/L)^0.5

here K = 100 and L = 121

So MP of Labour = 9.090909 units, i.e by increasing 1 unit of labour the MP increases by 9.09 units.

If we increase the labour by 1 more unit i.e. 122 units, the MP decreases to 9.05 units

If wage rate is $10 per unit and out put is $2 per unit, then by increasing labour by 1 unit and incurring

$10, the firm is getting output at value = 18.10(9.05 * $2)

Thus we can say that the firm is operating efficiently in the short run and the optimum rate of labour

input is $ 10 and 121 units and by increasing any labour unit the MP of labour decreases.

Factors contributing to Labour Efficiency:

a Division of Labour

b Specialization in assigned job

c Increase in skill and knowledge

d Job Training

e Experience

f Motivation

2. Explain how equilibrium of the firm is achieved. Also, explain (along with examples)

how profit maximizing output is determined in short run and long run for:

a. Perfect Competitive market

b. Monopoly market

c. Monopolistic market

d. Oligopoly market

Answ: Equilibrium of the firm is achieved:-

The concept of equilibrium firm was developed by A.C. Pigoy was of the opinion that an equilibrium firm is one which has reached a stage where there is no urge or incentive to expand further.

In other words, the owners of the business firm are satisfied with its profitability and do not want any further expansion or contraction in its size. It may be pointed out that according to economists, firm is in equilibrium when marginal revenue is equal to marginal cost an at this level of output, there will be maximum profits.

A firm is the smallest unit of production or sale. Microeconomic theory is an equilibrium analysis. It is concerned with the behavior of demand and supply forces. Marshall is reported to have said that demand and supply are like two blades of a pair of scissors. Demand is a result of the utility-maximizing behavior of a consumer in rational bounds. Similarly supply is an outcome of the profit-maximizing behavior of a firm, again in rational bounds.

Firms may have different organizational forms. A firm may be an individual enterprise, a partnership, a joint stock company, a corporate body, a cooperative enterprise or a public utility agency. Again a firm may be a producer, seller, trader, exporter or a financier. In any one of these capacities, firms show similar basic tendencies. In order to maximize its profits a firm has to maintain as large a difference between what it spends on resources or cost of production and what it earns by selling goods in the form of revenue or returns. The difference between the two is the firm's profit. So the firm has to keep its cost of production as low as possible. On the other hand, it has to charge a high price and sell as much quantity of products as possible. In this respect, the firm's actions are related to the behavior of consumers.

Price of market balance:

? P