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.

Consider such a firm in the short run, when labour is the only variable input. 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 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 . 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 the marginal physical product of capital, MPK.)