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Making dresses in a labor intensive process. Indeed, theproduction function of a dress making firm is well described by theequation Q=L – L^2/800, where Q denotes the number of dresses perweek and L is the number of labor hours per week. The firms cost ofhiring an extra hour of labor is $20 per hour (wage plus fringebenefits.) The firm faces the fixed selling price, P = $40. a.) How much labor should the firm employ? What are itsresulting output and profit? b.) Over the next 2 years, labor costs are expected to beunchanged, but dress prices are expected to increase to $50. Whateffect will this have on the firm’s optimal output? Explain.Suppose that inflation is expected to increase the firm’s laborcost and output price by identical (precentage) amounts. Whateffect would this have on the firm’s output. c.) Finally, suppose that MCL =$20 and P=$50 but that laborproductivity (output per labor hour) is expected to increase by 25%over the next 5 years. What effect would this have on the firm’soptimal output? Explain.


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