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# 16 - CHAPTER 16 LABOR THE HUMAN INPUT 1 The supply of...

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C HAPTER 16 L ABOR : T HE H UMAN I NPUT 1. The supply of youthful, (fairly) unskilled labor is relatively high in colleges and college towns. This leads one to expect that the marginal productivity of such labor is driven to fairly low levels, and the consequence is low wages. The college itself may be such a major employer of student labor that it can act as a monopsonist, and reduce the wage below the value of the marginal product. If students formed a union they might be able to withhold labor, and/or insist on a minimum wage that is higher than the prevailing wage. They would face the danger, however, of reduced employment. 2. No. Marginal productivity determines the demand schedule for labor, but the actual wage is determined by the interaction of supply with that demand schedule. Since college teaching appears to be an attractive profession, the supply of potential teachers is ample, and the wage therefore not very high. Put differently, the wage is equal not to the average productivity but to the marginal product, and if there are many teachers the marginal product can be driven down to a relatively low level. 3. Number of Chefs Number of Pizzas per Day Marginal Physical Product Marginal Revenue Product when P = \$9 Marginal Revenue Product when P = \$12 1 40 40 \$360 \$480 2 64 24 216 288 3 82 18 162 216 4 92 10 90 120 5 100 8 72 96 6 92 –8 –72 –96 (a) The MPP schedule is in the third column. (b) The fourth column contains the MRP schedule, when pizzas sell for \$9. (c) If the wage rate is \$100, the pizza parlor hires 3 chefs. It would not pay to hire the fourth, because the wage would exceed the MRP. If the wage rose to \$125, employment would still be 3 chefs. (d) If the price of pizzas is \$12, the MRP schedule, which is the derived demand schedule for chefs, is shown in the fifth column. At a wage of \$100, the firm hires 4 chefs, and at a wage of \$125, employment would be cut to 3 chefs. 4. Going to college entails considerable expenses—the out of pocket expenses for tuition, books, etc., plus the opportunity cost of earnings forgone. On the other hand, going to college today is likely to lead to higher earnings in the future. If the future improved earnings are greater in money terms than the current expenses, then one can compute a rate of interest which, when used to discount the future earnings, would make them equal to the current expenses. This is the financial rate of return on ones college education. If the financial rate of return on a college

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• Spring '09
• William
• marginal productivity, marginal revenue product, higher marginal productivity, higher marginal productivities

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16 - CHAPTER 16 LABOR THE HUMAN INPUT 1 The supply of...

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