Question

2. A competitive firm must decide on how much labor L to employ in production of output Y. Suppose that Y = 0 In(L) with probability T, and Y =0,In(L) with probability 1-2, where 0<x<1 and > > 0. Thus, the marginal product of labor is a random variable. Each unit of labor costs w and each unit of output is sold at the market price P. Both wage and output price are known to the firm. The firm has no other costs or revenues. Use this information to answer the following questions. a. Solve for the optimal labor input L that maximizes expected profits. Write the solution explicitly. b. Next, suppose that the firm is risk averse and has utility function for profits Uirt ) for profit Tt. Derive the first order necessary condition for optimal labor L* in this case. c. Show that (PC/w) <L* < (POH/w). Can you argue that L* <L?

Answer 1

ANSWER The Competitive critession in the market place is a case scensario where in the maxlect structure many business sell a homogenous product Competitively without battico entry to the market. The purpose of resource allocation is to promote efficient and management of seasie resources available, it also entails proper utilization of the resources The rules of the game" associated with masket Isansaction's osci- * An example where the markect exchange is unable to allocate de soutic effictively in a slenatio , where the government takes control of the market by imposing high taxes on certain commodities for instance sugar. The Competitive critersion for this scenatio is the Competition between the government and private investors.