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Lecture52

# Lecture52 - The Classical Long-Run Model Part II Ariel...

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Unformatted text preview: The Classical Long-Run Model - Part II Ariel Singerman January 28, 2008 Ariel Singerman () The Classical Long-Run Model - Part II January 28, 2008 1 / 16 Neo-classical theory of distribution - choice variables What are those profit maximizing variables (K and L)? Labor The more labor a firm uses ⇒ the more output it produces. Marginal Product of Labor is the additional amount of output a firm gets from using one extra unit of labor (holding the amount of K used constant) Mg.Prod.L.= F(K, L+1)-F(K,L) In general, as more labor is added (ceteris paribus), Mg.Prod.L. decreases. Or what is the same each worker is less productive. Ariel Singerman () The Classical Long-Run Model - Part II January 28, 2008 2 / 16 Neo-classical theory of distribution - choosing Labor When deciding whether to hire one additional unit of labor, the firm considers how that decision affects profits. That is, it compares the extra revenue that it gets from the increase in production as a result from that additional labor, to the extra cost of having to pay higher wages. ↑ in revenue then depends on: MPL (how productive an additional unit of labor is) Price of the output This is so because each extra unit of labor produces MPL units of output and each unit of output sells for P dollars Ariel Singerman () The Classical Long-Run Model - Part II January 28, 2008 3 / 16 Neo-classical theory of distribution - choosing Labor (ct’d) Extra revenue is: P * MPL Extra cost is: w So, extra profit =P * MPL - w Therefore, the decision rule is: P * MPL > w ⇒ hire more labor P * MPL = w ⇒ stop hiring P * MPL < w ⇒ lay off Ariel Singerman () The Classical Long-Run Model - Part II January 28, 2008 4 / 16 Neo-classical theory of distribution - choice variables II What are those profit maximizing variables (K and L)?...
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Lecture52 - The Classical Long-Run Model Part II Ariel...

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