Beruflich Dokumente
Kultur Dokumente
Derive the profit-maximizing, competitive firm’s demand function for labor L*(r,w,p),
where r is the per-unit price of capital, w is the per-unit price of labor, and p is the per-unit
price of output, and, if possible, determine the sign of ∂L*/∂w.
π = pX(K,L) – rK – wL
= p[0.5K1/2 + 0.5L1/2] – rK – wL
∂π/∂K = p(1/4)K-1/2 – r = 0
∂π/∂L = p(1/4)L-1/2 – w = 0.
(L/K)1/2 = r/w
K = (w/r)2L
L*(p,r,w) = (p/4w)2
∂L*/∂w = - 2p24-2w-3 = - (1/8)p2w-3< 0
where p is the per-unit price of output, and w is the per-unit price of labor. Use Hotelling’s
Lemma to derive the firm’s
(20) 3. Suppose that a worker-owned firm produces a single output X by combining the variable
inputs labor L and materials M according to the production function X = f(L,M), exhibiting
strictly positive and diminishing marginal products. Fixed inputs already in place, such as
office space and equipment, are ignored. The output of the firm is sold in a competitive
market at the fixed price p and materials are purchased at fixed price r. The firm’s net
earnings e = pX – rM are distributed equally among the workers as “dividends” or “profit
shares” w = e/L. The firm chooses L and M to maximize w = (pX – rM)/L subject to the
technology constraint X = f(L,M). The optimal values of the choice variables can be
expressed as the solution functions L*(p,r) and M*(p,r) which, in turn, imply solution
functions for optimal output X*(p,r), net earnings e*(p,r), and profit shares w*(p,r).
a. Derive expressions for and determine the signs of ∂w*/∂p and ∂w*/∂r.
The firm chooses L and M to maximize w = (pX – rM)/L, subject to the technology
X = f(L,M). Substituting f(L,M) for X into the maximand we have
These results reveal that the dividend function w*(p,r) is analogous to a profit
function, expressed in per capita terms. Application of Hotelling’s Lemma to
w*(p,r) yields the desired results directly.
b. What happens to output per worker (“labor productivity”) if output price p rises?
Why?
c. What happens to output per worker if the price of materials r rises? Why?