Principles of Economics- Mankiw (5th) 390

Principles of Economics- Mankiw (5th) 390 - 402 PA R T S I...

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402 PART SIX THE ECONOMICS OF LABOR MARKETS Now consider how many workers the firm will hire. Suppose that the market wage for apple pickers is $500 per week. In this case, the first worker that the firm hires is profitable: The first worker yields $1,000 in revenue, or $500 in profit. Sim- ilarly, the second worker yields $800 in additional revenue, or $300 in profit. The third worker produces $600 in additional revenue, or $100 in profit. After the third worker, however, hiring workers is unprofitable. The fourth worker would yield only $400 of additional revenue. Because the worker’s wage is $500, hiring the fourth worker would mean a $100 reduction in profit. Thus, the firm hires only three workers. It is instructive to consider the firm’s decision graphically. Figure 18-3 graphs the value of the marginal product. This curve slopes downward because the mar- ginal product of labor diminishes as the number of workers rises. The figure also includes a horizontal line at the market wage. To maximize profit, the firm hires
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