You run a small business that uses both capital and labor to produce your output. The machinery (capital) has a marginal cost equal to $25 per hour and a marginal product cost equal to 50 units per hour. The marginal cost and marginal product of capital are assumed fixed at these levels regardless of the level of output. Assume wages are your only cost for labor and your firm’s wage rate equals $12 per hour. You are given the following information on the output and productivity of labor. Assume the firm is interested in maximizing profits.

Units of Labor          Total Output per Hour

      1                                   35

      2                                   65

      3                                   89

      4                                  109

      5                                  124

A. How many units of labor will the firm use? Explain your answer.

B. Currently under consideration in many cities and states is a law that would raise the minimum wage to $15 per hour. Assuming that is the only cost for labor, how many units of labor will the firm use if the wage rate is increased to $15? Explain your answer.