Add+-+Labor+Market - The Demand for Labor When should a...

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1 The Demand for Labor When should a firm hire another worker? Firm’s Goal: Raise Profits Profits = Revenues - Costs To answer the question, decide if profits will rise or fall when another worker is hired.
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2 Will Profits Rise or Fall? Additional Profit = Additional Revenue – Additional Costs Additional Revenue: P Y Also Called Marginal Revenue, Extra Output, Y, Sold at Price P Additional Labor Costs: W Marginal Physical Product of Labor = Y
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3 Do Profits Rise? Yes if Additional Revenues > Additional Costs Hire More Labor if P Y > W Continue to Hire More Labor Until P Y = W
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4 Hire Until Marginal Revenue Equals Marginal Cost Equivalently, Hire More Until the Marginal Physical Product of Labor Equals the Real Wage Decision Rule: Y = W/P Pick a Value for the Real Wage, (W/P) 0 , and the Firm Uses the Decision Rule to Determine the Profit-Maximizing Labor Input, L 0
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5 W/P (W/P) 0 L 0 L
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6 The Labor Demand Schedule Suppose that the firm has the profit- maximizing labor force, L
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Add+-+Labor+Market - The Demand for Labor When should a...

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