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Unformatted text preview: First, let us consider the market for hot chocolate when the price of marshmallows increases. Assuming that marshmallows and hot chocolate are complementary goods, the rise in the price of marshmallows causes a drop in the demand for hot chocolate. When demand for hot chocolate shifts in (drops), the price of hot chocolate falls. This drop in the price of hot chocolate lowers the MRP of every worker in the hot chocolate industry. Why is this the case? Say that Charlie the hot chocolate maker can make 1000 packets of hot chocolate every day. If the price was originally $1 a packet, his MRP was $1000 a day. If the price falls to $0.75 a packet, Charlie can still only make 1000 packets a day, and so his MRP has fallen to $750. MRP, remember, is equal to the price times the marginal product of each worker. MRP = (P) x (MP) Therefore, when because of the drop in price the MRP shifts in across the board, firms,...
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- Fall '11