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Unformatted text preview: t of labor is W (i.e. the wage) Example: Demand for Labor How much is the marginal unit of labor worth to the firm?
1. Depends on how much output that marginal unit of labor generates Marginal product of labor (MPL) 2. Depends on how much revenue additional units of output generate Marginal Revenue Product of Labor If firm is a price taker in the output market, each additional unit of output sells for the given market price, P MRPL = P . MPL Demand for Labor If MRPL > W, then Hire more workers Increase output If MRPL < W, then decrease output Hire fewer workers Reduce output When output is infinitely divisible, then we expect profit maximization to imply: MRPL = W output/ unit of L $/unit of L W Demand for Labor W Labor Demand P*MPL = MRPL MPL L* L* L Demand for Labor The MRPL curve is the Labor Demand curve Diminishing marginal productivity implies demand curve is downward sloping Ensures unique value of L at which MRPL = W That value of L is the amount of labor optimally employed Labor Demand Revisited An Example Suppose firm hires L* units of labor: MPL = 10 P = $5 W = $50 MPL*P = 10 * $5 = $50 = W i.e. this is the optimal amount of labor to employ What if P = $500 and W = $5000? MPL * P = 10 * $500 = $5000 = W i.e. L* is still the optimal amount of labor to employ Labor Demand Revisited Labor demand depends on the...
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