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.)
