Chapter 3 The Demand for Labor

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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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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
• Marginal Product of Labor changes

Figure 3.1

Demand for Labor in the Short Run (Real Wage)

Figure 3.2

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

Scale Effect – less of both

Substitution Effect – less L, more K

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

Figure 3.3

Figure 3.8

Payroll Tax with a Vertical Supply Curve

Figure 3A.1

A Production Function

Figure 3A.2

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

Figure 3A.5

The Substitution and Scale Effects of a Wage Increase