A worker-managed firm is a firm managed by elected representatives of its employees. Such firms are believed to maximize profits per worker rather than total profits, as described in the text, pp. 196-200. If such a firm faces a product price, P, which it cannot alter by changing its output, will it have an upward-sloping product supply curve in the short run, when labour is the only variable input, or will its short-run supply curve be downward-sloping? 

Will an increase in demand cause P to rise by more, less, or the same as the demand increase? You may assume diminishing returns to labour and constant returns to scale in production (Hint: Suppose this firm produces an output, Q, with labour, L, and capital, K. In the short run, K is fixed, as are capital costs, F. If MPL is labour’s marginal physical product, the profit-per-worker maximum is where P(MPL) = (PQ – F)/L as at A in Fig. 6.1, p. 197 of the text. Now re-arrange this equality so that F/P is alone on one side of the equation. It can be shown that constant returns to scale implies Q = (MPL)L + (MPK)K, while diminishing returns to labour then implies that an increase in L raises MPK.)

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The firms goal in calculating how much output to offer is to maximise profits while keeping two restrictions in mind the demand for the firms product from consumers and the firms production expenses T... View the full answer