The correct answer.
Answer to Problem 1QQ
Option ‘a’ is the correct answer.
Explanation of Solution
Option (a):
The firm would employ labor and capital at the point where the marginal revenue product of labor and capital is equal to wage and rental price of capital. The marginal revenue product of labor can be calculated as follows:
Marginal revenue product of labor is $25.
Marginal revenue product of capital can be calculated as follows:
Marginal revenue product of capital is $200.
When increasing the quantity of labor and capital, it leads to reduce the marginal product of labor and capital, respectively, which in turn reduce the marginal revenue product of labor and capital. Thus, the firm would increase labor and capital till the point where the marginal revenue product of labor and capital is equal to wage and rental price of capital.
Thus, option (a) is correct.
Option (b):
When increasing the quantity of capital, it reduces the marginal product of capital and marginal revenue product of capital because of diminishing return. Thus, if the firm wants to maximize the profit, the manager should rent more capital. Thus, option (b) is incorrect.
Option (c):
When increasing the quantity of labor, it leads to reduce the marginal product of labor, which in turn reduces the marginal revenue product of labor and capital. Thus, if the firm wants to maximize the profit, the manager should hire more labor. Thus, option (c) is incorrect.
Option (d):
When increasing the quantity of labor and capital, it leads to reduce the marginal product of labor and capital, which in turn reduce the marginal revenue product of labor and capital. Thus, to maximize profit, the manager should increase both the quantity of labor and rent more capita. Thus, option (d) is incorrect.
Marginal product of labor (MPL): It is the additional output a firm produces as a result of employing an extra unit of labor.
Marginal product of capital (MPK): It is the additional output a firm produces as a result of using an extra unit of capital.
Want to see more full solutions like this?
Chapter 3 Solutions
Macroeconomics
- What is the difference between financial investment and economic investment? 1) There is no difference between the two. 2) Financial investment refers to the purchase of financial assets only; economic investment refers to the purchase of any new or used capital goods. 3) Economic investment is adjusted for inflation; financial investment is not. 4) Financial investment refers to the purchase of assets for financial gain; economic investment refers to the purchase of newly created capital goods.arrow_forwardAssume that a national restaurant chain called BBQ builds 20 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $400,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 400,000 shares of stock at $40 per share. a. What is the amount of economic investment that has resulted from BBQ’s actions? $_________ million b. How much purely financial investment took place? $__________ millionarrow_forwardSince the end of World War II, manufacturing firms in the United States and in Europe have been moving farther and farther outside of central cities. At the same time, firms in finance, insurance, and other parts of the service sector have been locating near downtown areas in tall buildings. One major reason seems to be that manufacturing firms find it difficult to substitute capital for land, whereas service-sector firms that use office space do not. a. What kinds of buildings represent the substitution of capital for land? b. Why do you think that manufacturing firms might find it difficult to substitute capital for land? c. Why is it relatively easier for a law firm or an insurance company to substitute capital for land?arrow_forward
- Table 1 Production Function and Demand for Labor Schedules Quantity of labor demanded (billions of hours per year) 0 2 4 Real GDP (billions of 2012 dollars) 0 105 150 Real wage rate (2012 dollars per hour) 75 45 15 Table 2 Supply of Labor Schedule Quantity of labor supplied (billions of hours per year) 0 2 4 Real wage rate (2012 dollars per hour) 15 45 75 Use the information in the schedules above to draw this economy's production function. Label it. Draw a point to show equilibrium employment and potential GDP. At the full-employment quantity of labor, what is the real wage rate? The real wage rate is $ an hour.arrow_forwardin 2019 fiscal year estimated that Ghanaians saved 20 percent of their disposable income; however, due to overconsumption in the previous year, autonomous saving for 2019 was negative 100 million Ghana cedis. The government of Ghana imposed a lump sum tax of Gh ₡ 20 million. In addition to the lump sum tax the government also took 20 percent of all incomesearned in the economy in the form of proportional tax. The total government expenditure was GH ₡50 million in 2019. Total investment recorded for 2019 was 66 million. (A) Determine the tax function for this economy, derive the consumption function based on the above information and write out the aggregate demand equation (b) Determine the equilibrium consumption and calculate the value of the government expenditure multiplier for this economy and interpret your result (c) Calculate the total tax revenue to the governmentarrow_forwardUsing a graph and words, explain the effect of SRAS and LRAS curves when the President of the United States would give businesses who invested in new plant and equipment an investment tax credit equal to 10 percent of their investment and the marginal tax rate has been reduced to people who make over $50,000 and are permanent. Will you work more or less when marginal tax rates are cut and will businesses invest more in plant and equipment when an investment tax credit has been implemented by the President of the United States? Also explain in your graph what will happen to equilibrium price level and equilibrium real GDP and the unemployment rate when the marginal tax rates are cut and are permanent for people making over $50,000 and the investment tax credit has been implemented by the President of the United States.arrow_forward
- True and False 1. total consuption expenditure by households includes expenditure by foreign tourist 2. annual households consuption is equal to households consuption expenditure plus that of general government 3. actual consuption of general government is equal to its collective consuption expenditure 4. fixed capital formation excludes transport equipment and live cattlearrow_forwardGive typing answer with explanation and conclusion Investment adds to the nation's stock of capital so long as no resources are allocated to consumption. True/Falsearrow_forward
- Principles of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of MicroeconomicsEconomicsISBN:9781305156050Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
- Principles of Microeconomics (MindTap Course List)EconomicsISBN:9781305971493Author:N. Gregory MankiwPublisher:Cengage Learning