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Ch14_Pindyckfinal

# Ch14_Pindyckfinal - Chapter 14 Markets for Factor Inputs...

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Chapter 14 Markets for Factor Inputs

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Dr. Carlos Asarta Chapter 14 2 Competitive Factor Markets Characteristics 1. Large number of sellers of the factor of production 2. Large number of buyers of the factor of production 3. The buyers and sellers of the factor of production are price takers
Dr. Carlos Asarta Chapter 14 3 Competitive Factor Markets Demand for a factor input when only one input is variable: Factor demands are derived demand Demand for an input that depends on, and is derived from, both the firm’s level of output and the cost of inputs Demand for computer programmers is derived from how much software Microsoft expects to sell

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Dr. Carlos Asarta Chapter 14 4 Factor Input Demand – One Variable Input Assume firm produces output using two inputs: Capital (K) and Labor (L) Hired at prices r (rental cost of capital) and w (wage rate) K is fixed (short run analysis) and L is variable Firm must decide how much labor to hire
Dr. Carlos Asarta Chapter 14 5 Factor Input Demand – One Variable Input How does a firm decide if it is profitable to hire another worker? If the additional revenue from the output of hiring another worker is greater than its cost Marginal Revenue Product of Labor (MPR L ) Additional revenue resulting from the sale of output created by the use of one additional unit of an input

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Dr. Carlos Asarta Chapter 14 6 Factor Input Demand – One Variable Input The incremental cost of a unit of labor is the wage rate, w Profitable to hire more labor if the MRP L is at least as large as the wage rate, w Must measure the MRP L
Dr. Carlos Asarta Chapter 14 7 Factor Input Demand – One Variable Input MRP L is the additional output obtained from an additional unit of labor, multiplied by the additional revenue from an extra unit of output Additional output is given by MP L and additional revenue is MR

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Dr. Carlos Asarta Chapter 14 8 Factor Input Demand – One Variable Input ) )( ( MR MP MRP L Q Q R L R Q R MR L Q MP L R MRP L L L L = = = = = and labor is L and revenue is R where
Dr. Carlos Asarta Chapter 14 9 Factor Input Demand – One Variable Input In a competitive market, MR = P This means, for a competitive market ) )( ( P MP MRP L L = Graphically, diminishing marginal returns, MP L falls as L increases

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Dr. Carlos Asarta Chapter 14 10 Marginal Revenue Product Hours of Work Wages (\$ per hour) MRP L = MP L x P Competitive Output Market ( P = MR) MRP L = MP L x MR Monopolistic Output Market ( P < MR )
Dr. Carlos Asarta Chapter 14 11 Factor Input Demand – One Variable Input Choosing the profit-maximizing amount of labor: If MRP L > w (the marginal cost of hiring a worker): hire the worker If MRP L < w: hire less labor If MRP L = w: profit maximizing amount of labor

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Dr. Carlos Asarta Chapter 14 12 S L In a competitive labor market, a firm faces a perfectly
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Ch14_Pindyckfinal - Chapter 14 Markets for Factor Inputs...

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