191T10 - ECON191 (Spring 2009) 27-28.4.2009 (Tutorial 10)...

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1 ECON191 (Spring 2009) 27-28.4.2009 (Tutorial 10) Chapter 10: Market for Input Factors (Chapter 14of Textbook) ± Assumption: Competitive factor market Ö Large numbers of buyers and sellers of factors of production Ö The buyers and sellers are price takers in the input market Demands for factor inputs ± Demand for inputs are derived demands ± Demand for an input depends on both the firm’s level of output (market conditions for the final products produced) and the cost of inputs ± Demand curve for input is the MRP L curve ± Marginal revenue product of labor( MRP L ) : Additional revenue resulting from the sale of output created by the use of one additional unit of an input Ö MRP L is also the additional output obtained from the additional unit of labor, multiplied by the additional revenue from an extra unit of output Ö MRP L = MP L × P = MP L × MR Ö MP L = Δ Q / L and MR = TR / Q Ö MRP L = TR / L Ö The demand for input, which is MRP L curve is downward sloping as MP L falls with output due to diminishing marginal return, and P is constant ± In a competitive labor market, a firm faces a perfectly elastic supply of labor and can hire as many workers as it wants at W*. Ö W* is the cost of hiring a labor ± The profit maximizing firm will hire L* units of labor at the point where MRP L = W Market demand for labor ± The market demand could be
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191T10 - ECON191 (Spring 2009) 27-28.4.2009 (Tutorial 10)...

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