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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 / Δ L and MR = Δ TR / Δ Q Ö MRP L = Δ TR / Δ 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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