Production Function of a Dressmaking Firm: How much labor should the firm employ and what is the res

Production Function of a Dressmaking Firm: How much labor
should the firm employ and what is the resulting output and profit?

Making dresses is a labor-intensive process Indeed, the
production function of a dressmaking firm is well described by the equation
Q=L-L^2/800, where Q denotes the number of dresses per week and L is the the
number of labor hours per week The firm’s additional cost of hiring an extra
hour of labor is about \$20 per hour (wage plus fringe benefits) The firm faces
the fixed selling price P=\$40

How much labor should the firm employ? What is its resulting
output and profit?

Over the next two years, labor costs are expected to be
unchanged, but the dress prices are expected to increase to \$50 What affects
will this have on the firm’s optimal output? Explain Suppose instead that
inflation is expected to increase the firm’s labor cost and output price by
identical (percentage) amounts What effect would this have the firm’s output?

Finally, suppose once again that MCL=\$20 and P=\$50 but that
labor productivity (ie output per labor hour) is expected to increase by 25
percent over the next five years What effect would have this on the firm’s
optimal output? Explain