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This problem derives labor demand from a rm's prot maximization problem, when the rm faces a xed cost of setting up production. As in class,
This problem derives labor demand from a rm's prot maximization problem, when the rm faces a xed cost of setting up production. As in class, total output of a rm that hires L 2 0 workers is ALV, where A > O and O 0). There is no xed cost to the rm if it does not start production. The rm's prots are thus given by ALTwLF ifL>0, 'n': 0 LzO (a) How many workers does the rm hire if it hires any workers at all (i.e., if the rm starts production)? Your answer should be an expression for L involving A, \"y, and w. (Hint: F is exogenous, so it does not depend on L.) [1 mark] (b) Find an expression for the representative rm's prot (71') if it decides to start pro duction. For full mark, your answer should be an expression for 7r involving two terms: the i rst term is A (1)1\" (1 7), and the second involves F. Show each step. [Hints: The H) rst of the two terms equals AL\" wL when L is set as derived under (a). You may also use this insight: for any Z > O and 0
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