An Objective Function Reflects the Relevant Cost of Labor Hours

question 8

Multiple Choice

An objective function reflects the relevant cost of labor hours used in production rather than treating them as a sunk cost. The correct interpretation of the dual price associated with the labor hours constraint is

• A) the maximum premium (say for overtime) over the normal price that the company would be willing to pay.
• B) the upper limit on the total hourly wage the company would pay.
• C) the reduction in hours that could be sustained before the solution would change.
• D) the number of hours by which the right-hand side can change before there is a change in the solution point.

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Definitions:

Marginal Revenue

The extra revenue received from the sale of an additional unit of a product or service.

Elasticity Of Demand

A metric reflecting how demand for a commodity reacts to price adjustments.

Profit-Maximizing Price

The price level at which a company can sell its product to maximize its profit, calculated by understanding demand and cost structures.

Lerner Index

A measure of a firm's market power, calculated as the difference between price and marginal cost relative to price.