Question

Assume:         P_Q = $2.00                  P_L = $2.00                               P_K = $4.00

K         MP_K    MP/P_K            MRP/P_K          L          MP_L      MP/P_L                   MRP/P_L

1          28        7 14 1          15        5 10

2          24        6 12 2          12        4 8

3          20        5 10 3          9          3 6

4          12        4 8 4          6          2 4

5          8          2 4 5          3          1 2

6          4          1 2 6          1          0.5 1

7          2          0.5 1 7          0.5       0.25 0.5

8          1          0.25 0.5 8          0.25     0.13                 0.26

9          0.5       0.125   0.25                   9          0.125   0.06                 0.24

This firm will earn profit =

$248

$508

$299

$0

Answer 1

The correct answer is (a) $248

Profit Maximizing condition;

In order to maximize profit a firm should hires that amount of labor at which P*MRP_L = P_L and a firm should hires that amount of labor at which P*MRP_K = P_K.

Here P = 2 and P_L = 2. Hence he should hire that amount of L at which 2*MRP_L = 2 => MRP_L = 1. We can see from the above table MRP_L = 1 when L = 6. Hence he should hire 6 units of L.

Here P = 2 and P_K = 4. Hence he should hire that amount of L at which 2*MRP_K = 4 => MRP_K = 2. We can see from the above table MRP_L = 2 when K = 6. Hence he should hire 6 units of K.

Hence, total output produced = 28 + 24 + 20 + 12 + 8 + 4 + 15 + 12 + 9 + 6 +3 + 1 = 142.

Profit = TR - TC here TR = total revenue = 142*2 = 284

TC = total cost = 2*6 + 4*6 = 36.

Hence Profit = 284 - 36 = 248

Hence, the correct answer is (a) $248