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Chapter 3 The Demand for Labor - PowerPoint PPT Presentation

Chapter 3 The Demand for Labor. Profit Maximization. Marginal Benefit Marginal Product (MP) MP = change in Q/change in L Marginal Revenue (MR) = P MB=MP*MR Marginal Expense = wages Optimal Solution: MB=ME. Short Run. K fixed Firm chooses Q Chooses L given K

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The Demand for Labor

• Marginal Benefit

• Marginal Product (MP)

• MP = change in Q/change in L

• Marginal Revenue (MR) = P

• MB=MP*MR

• Marginal Expense = wages

• Optimal Solution: MB=ME

• K fixed

• Firm chooses Q

• Chooses L given K

• Marginal Product of Labor changes

Demand for Labor in the Short Run (Real Wage)

Demand for Labor in the Short Run (Money Wage)

• K can vary

• MRPL = MR*MP = wage

• MRPK=MR*MP = cost of capital

• If MR=P then P=w/MPL

P=c/MPK

• W/MPL=C/MPK

Equation is no longer equal

- cut L, raise K

• MPL rises

• MPK falls

• Cut K

Scale Effect – less of both

Substitution Effect – less L, more K

Effect of Increase in the Price of One Input (k) on Demand for

Another Input ( j ), Where Inputs Are Substitutes in Production

Figure 3.3

Payroll Tax

Figure 3.7

Payroll Tax with a Vertical Supply Curve

A Production Function

The Decline Marginal Productivity of Labor

Q* (Wage = \$10 per Hour; Price of a Unit of Capital = \$20)

Figure 3A.3

Q* (Wage = \$20 per Hour; Price of a Unit of Capital = \$20)

Figure 3A.4

The Substitution and Scale Effects of a Wage Increase