Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 10

A firm can manufacture a product according to the production function

a. Calculate the average product of labor, AP L , when the level of capital is fixed at 81 units and the firm uses 16 units of labor. How does the average product of labor change when the firm uses 256 units of labor?
b. Find an expression for the marginal product of labor, MP L , when the amount of capital is fixed at 81 units. Then, illustrate that the marginal product of labor depends on the amount of labor hired by calculating the marginal product of labor for 16 and 81 units of labor.
c. Suppose capital is fixed at 81 units. If the firm can sell its output at a price of $200 per unit and can hire labor at $50 per unit, how many units of labor should the firm hire in order to maximize profits?