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Chapter 3 The Demand for Labor

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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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Presentation Transcript
slide1

Chapter 3

The Demand for Labor

profit maximization
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
Short Run
  • K fixed
  • Firm chooses Q
  • Chooses L given K
  • Marginal Product of Labor changes
slide5

Figure 3.1

Demand for Labor in the Short Run (Real Wage)

slide6

Figure 3.2

Demand for Labor in the Short Run (Money Wage)

long run
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
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

slide9

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

slide11

Figure 3.8

Payroll Tax with a Vertical Supply Curve

slide12

Figure 3A.1

A Production Function

slide13

Figure 3A.2

The Decline Marginal Productivity of Labor

slide14

Cost Minimization in the Production of

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

Figure 3A.3

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Cost Minimization in the Production of

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

Figure 3A.4

slide16

Figure 3A.5

The Substitution and Scale Effects of a Wage Increase

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