04 Jun Question Problem #1 A firm has the following short-run production function:
Question
Problem #1
A firm has the following short-run production function:
Q = 50L + 6L^2 – 0.5L^3
Where Q = Quantity of output per week
L = Labor (number of workers)
^ exponential power L^2 implies L square
Note: More important than the algebra is the clear explanation of the implications behind the numbers for all three problems.
1. Assume that each worker is paid $10 per hour and works a 40-hour week. How many workers should the firm hire if the price of the output is $10?
2. During economic down turn, firms reduce price in order to stay competitive. For this reason, the price of the output falls to $7.50. What do you think be the short run impact of this price reduction on the number of workers hired and why?
3. What would firms do in the long run as far as production and hiring are concerned and why if economics situation does not improve and price reduction does not help their bottom line? Consider what business usually does if economic woe persists.
4. Henry Ford, the founder of Ford Motor Company, offered in 1914 $5 workday wage, which was about twice the going wage. What is the rationale behind Ford’s high-wage policy to the marginal productivity theory of employment discussed in the text book? What is the major difference in their respective goals? Be specific as to what each approach tries to achieve. Ford called “the $5-a-day wage” one of the finest cost-cutting moves.
In any hiring decision, there are typically three different problems; “adverse selection” due to “asymmetry of information” prior to hiring and of “moral hazard” after hiring in your answer. Please integrate these three terms, asymmetry of information, adverse selection, and moral hazard into your answer and explain clearly how Ford’s high wage policy specifically solved these three problems associated with hiring?
Problem #2
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