microbook_3e-page89

microbook_3e-page89 - product of labor falls (too many...

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Total, Average and Marginal Product diminishing marginal returns when additional units of a variable input are added to fixed inputs, the marginal product of the variable input declines (in the graph, diminishing marginal returns set in after point A) marginal product is the slope of the total product function point A – slope of the total product function is highest; thus, marginal product is highest point B – total product is maximum, the slope of the total product function is zero, and marginal product is zero Production with Two Inputs Inputs often work together and are complementary. x Ex. cooks (Labor) and grills (Kapital) x If you hire more cooks, but don’t add any more grills, the marginal
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Unformatted text preview: product of labor falls (too many cooks in the kitchen) x If you hire (rent) more grills, but dont add any more cooks, the marginal product of capital falls (grills sit idle) . Given the technologies available, a profit-maximizing firm: x hires labor up to the point where the wage equals the price times the marginal product of labor (MPL) x hires kapital up to the point where the rental rate on kapital equals the price times the marginal product of kapital (MPK) Cost Total Revenue Total ( Profits ) rK wL L) X(K, x p at profit maximum: MPL x p w MPK x p r Page 89...
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