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101+Class+20+W2009

# E this is the optimal amount of labor to employ what

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Unformatted text preview: wage relative to the price of output: P * MPL = W MPL = W/P W/P = the real wage Measures the amount of output that must be paid to the marginal worker Determinants of Quantity of Labor Demanded Wages Price of output Higher wages will reduce labor employed Higher output prices encourage higher employment Improved productivity of labor will encourage increased employment Technology Determinants of Quantity of Labor Demanded Other inputs used Increased use of some factors will increase the productivity of labor Increased use of some factors will decrease the productivity of labor Increased capital stock will often imply increased labor demand E.g.production line Prices of other inputs used will also be relevant E.g. if similar tasks can be accomplished by skilled and unskilled workers, an increase in number of skilled workers employed will reduce the marginal productivity of unskilled workers A Two Input Model Production uses labor (L) and capital (K) Price of labor = W (wage) Price of capital = R (rental rate) Production function: Q = f(K, L) Implied tradeoff between K and L Different combinations of K and L generate the same level of output A Two Input Model Optimal labor usage: MPL = W/P or P = W/MPL W/MPL = number of dollars required to increase output by 1 unit (using labor) Optimal capital usage: MPK = R/P or P = R/MPK R/MPK = number of dollars required to increase output by 1 unit (using capital) Profit maximization implies: W/MPL = R/MPK or W/R = MPL/MPK Example: Light bulb manufacturing GE owns light bulb plants around the world, including: Austintown, Ohio Budapest, Hungary (Tungsram, purchased in 1989) Plants have access to the same technology Plants do not look similar Owned by the same firm Hungarian plant looks like something out of the 1950s Why? Example: Light bulb manufacturing Pro...
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