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Determine whether each statement below is TRUE or FALSE and explain your reasoning 1
Determine whether each statement below is TRUE or FALSE and explain your reasoning 1.If the value of the marginal product of labor exceeds the wage rate, then a competitive, profit-maximizing firm would want to hire less labor. 2.A competitive, cost-minimizing firm has the production function f (x,y)= x+ 2y and uses positive amounts of both inputs. If the price of x doubles and the price of y triples, then the cost of production will more than double.
Expert Solution
Answer and Explanation:
1. The statement is FALSE because in competitive market, the firm employ the labor till the point where the marginal product of labor is equal to the wage rate of the market.
2. The statement is TRUE because
The production function is of perfect substitutes which mean that any change in the price of one input will lead to use of the other input. So,
MRTS=PXPY12PY=PXPY=2PXMRTS=PXPY12PY=PXPY=2PX
Where Px is price of input X and Py is price of input Y.
Now if PY?2PXPY?2PX , then the firm will use only X input which means that the actual cost will double only. Whereas, if PY?2PXPY?2PX, then the firm will use input Y which will lead to triple increase in the cost of production.
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