PAM 200 10.17 - PAM 200 Possible Solutions to...

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PAM 200 10/17/07 Possible Solutions to Principle-Agent Pros Bonuses Stock Options Monitoring o Problems: Someone needs to monitor the monitor Production Produce a generic unit of Output Y o To produce Y requires labor and capital; Y=F (L,K) L= # of units of labor K= a fixed quantity of capital
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Marginal Product of Labor (MPL): is the additional output from an additional unit of labor= Change in Y/ Change in L Average Product of Labor (APL): The avg. output per worker= Y/L Ex. L Y MPL APL 0 0 0 x 1 10 10 10 2 15 5 7.5 Returns to Scale 1) Increasing returns to scale (IRS): when the rate of change of output increases as labor is added (marginal additions keep on increasing)
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MPL > APL 2) Constant Returns to Scale (CRS): Every additional unit of labor increases output by the same amount
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APL=MPL 3) Decreasing Returns to Scale: As additional workers are added the change in output becomes smaller MPL < APL
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MPL is the slope of the production function so the steepest point has the highest MPL
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