Question

The table below presents estimates of the maximum levels of output possible with various combinations of two inputs. Capital (K)
5	13		27		39		49		53
4	12		25		35		43		46
3	10		20		27		33		36
2	7		13		18		22		24
1	3		7		10		12		13
1		2		3		4		5
Labor (L) Assume that a unit of output sells for $5 and that the firm currently employs 3 units of capital (K = 3). (i) What is the average product of labor when L = 4? (ii) What is the marginal product of labor when L = 4? (iii) What is the marginal revenue product of labor when L = 4? (iv) What is the output elasticity of labor when L? (v) What is the interpretation of the output elastic of labor in iv?

Answer 1

For the K=3, the table for L can be reproduced as below.

Q(at K=3)	10	20	27	33	36
L	1	2	3	4	5

(i) When L=4, the output is Q=33. The average product of labor there would be .

(ii) The marginal product of labor would be ratio of change in output and change in labor. For previous labor and output, we have the MPL as .

(iii) The marginal revenue product would be the MPL at L=4, times the price pf output, ie dollars.

(iv) The output elasticity would be the ratio of percentage change in output and percentage change in labor, and for the previous labor and output, we have or or or .

(v) The elasticity of output with respect to labor would be that, for a unit percent increase in labor, the output increases by 0.667 percent.