Question

Suppose that the current wage rate is $40 per hour, the rental rate of land is $10,000 per acre, and the rental rate of capital is $1000. The manager of a firm determines that the value of the marginal product of labor is $800, the value of the marginal product of an acre of land is $150000, and the value of the marginal product of capital is $40,000. Is the firm maximizing profit

Answer 1

Answer:

The firm is not maximizing profit.

Explanation:

Under the profit maximization theory for two or more inputs, a firm or producer maximizes his profit at a point where the ratios of the marginal producer to cost per unit of each input are equal to one another. This implies that profit is maximized when profit per dollar of all goods are equal. Therefore, profit is not being maximized by the firm is this condition does not hold.

Based on the this question, profit is being maximized by the firm if we have the following:

MPL/W = MPLA/RL = MPC/RC ……………………………. (1)

Where;

MPL = Marginal product of labour = $800

W = Wage rate = $40

MPLA = Marginal product of an acre of land = $150,000

RL = Rental rate of land = $10,000

MPC = Marginal product of capital = $40,000

RC = Rental rate of capital = $1.000

Substituting the values into equation (1), we have:

$800 / 40 $\neq$ $150,000 / $10,000 $\neq$ $40,000 / $1,000

$20 \neq 15\neq 40$

Since $20\neq 15\neq 40$, this implies that the firm is not maximizing profit.

To maximize profit, the firm will have to adjust its number of inputs use until MPL/W = MPLA/RL = MPC/RC.