Chapter Review

p* , , , , $ , =- + ( ) - ( ) = 10000 100201000 101000 10000 2 Royalty = . , $, ( ) = 01510000 1500 Clearly,when NDO is a sales maximizer,Wren and Skimpy will choose the first contract.

CHAPTER REVIEW

The marginal product of labor (MPL) is the change in total output given a unit change in the amount of labor used.The marginal revenue product of labor (MRPL) is the change in the firm’s total revenue resulting from a unit change in the amount of labor used.The marginal revenue product is the marginal product of labor times the selling price of the product (i.e., MRPL = P ¥ MPL).

Total labor cost is the total cost of labor.The total cost of labor is the wage rate times the total amount of labor employed.The marginal resource cost of labor (MRCL) is the change in total labor cost resulting from a unit change in the number of units of labor used.If the wage rate (PL) is constant,then the wage rate is equal to the marginal cost of labor.

A profit-maximizing firm that operates in perfectly competitive output and input markets will employ additional units of labor up to the point at which the marginal revenue product of labor is equal to the marginal labor cost (i.e., P ¥ MPL = PL).In general,for any variable input i,the optimal level of variable input usage is defined by the condition P ¥ MPi = Pi.

The optimal combination of multiple inputs is defined at the point of tangency between the isoquant and isocostcurves.The isoquant curve represents the different combinations of capital and labor that produce the same level of output.The slope of the isoquant is the marginal rate of technical substitution.The isocost curve represents the different combinations of capital and labor the firm can purchase with a fixed operating budget and fixed factor prices.The slope of the isocost curve is the ratio of the input prices.

The optimal combination of capital and labor usage is defined by the condition MPL/MPK = PL/PK.This condition may be rewritten as MPL/PL = MPK/PK,which says that a profit-maximizing firm will allocate its budget in such a way that the last dollar spent on labor yields the same amount of additional output as the last dollar spent on capital.This condition defines the firm’s expansion path.

The objective of profit maximization facing the decision maker may be dealt with more directly.The problem confronting the decision maker is to choose an output level that will maximize profit.Define profit as the difference between total revenue and total cost,both of which are functions