Marginal Output and Productivity
Imagine there are 100 firms in a perfectly competitive industry. Each produces an output, q, using labour L and capital K according to the following short-run production function:
q = 5 + 4L – .25L2 + K
Each firm currently has five units of K. The price of each worker is $50 per day. The price of capital, K, is $100 per day. Suppose the industry is in long and short-run equilibrium.
a. How much output does each individual firm produce?
b. How much output does the entire industry produce?
c. What is the price of output in this industry?