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Chapter 3 The Demand for LaborPowerPoint Presentation

Chapter 3 The Demand for Labor

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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
- Marginal Product of Labor changes

Example – Apples are $.50Wages are $4.50

Demand for Labor in the Short Run (Real Wage)

Demand for Labor in the Short Run (Money Wage)

Long Run

- 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

If wages rise

Equation is no longer equal

- cut L, raise K

- MPL rises
- MPK falls
- Cut K
- Adjust until optimal again
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 with a Vertical Supply Curve

A Production Function

The Decline Marginal Productivity of Labor

Cost Minimization in the Production of

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

Figure 3A.3

Cost Minimization in the Production of

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

Figure 3A.4

The Substitution and Scale Effects of a Wage Increase

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