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LR Labor Demand_6

# LR Labor Demand_6 - Long Run Capital Not Fixed = P*F(L,K...

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1 Long Run Input Demand Ch3 pp. 70-75 Long Run – Capital Not Fixed π = P*F(L,K) – W*L – C*K The first order condition with respect to capital can be found just we did for labor. d π /dK = P*dF(L,K)/dK – C = 0 dF(L,K)/dK is the marginal product of capital, MP K , the change in output produced by increasing capital by one unit. Rearranging terms we find that: P*MP K = C First Order Conditions We’ve seen that the following conditions must hold for profits to be maximized: P*MP L = W and P*MP K = C In both cases, the marginal revenue of increasing the input by one unit is equal to the marginal cost of the same increase. In fact, this is true of all inputs. For example, consider a firm that hires skilled, L S , and unskilled, L U , workers. Let W S be the wage paid to skilled workers and W U be the wage paid to unskilled workers. To maximize profits, the firm would employ skilled and unskilled workers to satisfy the following conditions: P*MP SL = W S and P*MP UL = W U Balancing Inputs

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LR Labor Demand_6 - Long Run Capital Not Fixed = P*F(L,K...

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