Sides Game
Diminishing returns begin with worker #
3
Workers
0
1
2
3
4
5
Paperclips
0
20
42
60
65
66
MPP of worker #5 = 1
Workers
0
1
2
3
4
5
Paperclips
0
20
42
60
65
66
Wage = $10
Clips P = $1
MRC (MFC) of worker #2 = $10
Workers
0
1
2
3
4
5
Paperclips
0
20
42
60
65
66
The change in TR with the addition
of one more unit of input = MRP
Maximizing Profit
•
•
•
•
•
The last worker increased TPP 20 units
The last unit of capital increased TPP 30 units
The labor wage is $20/day
The capital interest is $30/day
Product price is $1
• The firm should keep things as they are.
• MRP/MRC of Labor = MRP/MRC of Capital = 1
Demand in the factors market is
dependent on demand for the factors
final product in the products market.
This is called derived demand.
A product market monopoly has a
steeper MRP curve than a firm selling
its output in a perfectly competitive
market.
An increase in worker productivity will
(increase or decrease) a firm’s demand
for workers.
• Increase because it increase MRP
The MRP curve is downward
sloping, even for firms in a
perfectly competitive products
market, because of the law of
diminishing marginal returns
Why is MFC above S?
Monopsonies must increase the wage
for all workers to increase the quantity
supplied of labor
A price increase in the product
market will cause a demand
increase in the factor market.
Wage = $10
Clips P = $1
How many workers should firm hire?
3- anymore and MRC >MRP
Workers
0
1
2
3
4
5
Paperclips
0
20
42
60
65
66
Only one buyer
• monopsony
An increase in the supply of labor will
do nothing to the demand for labor.
It will increase the QUANTITY
DEMANDED
Profit-maximizing quantity of labor…
• MRP = MRC (MFC)
If MRC (MFC) is greater than MRP, the
firm should
• Hire some
• Fire some
What type of Labor Market?
Monopsony
What are the TWO reasons that a
product monopoly’s MRP curve is
downward sloping?
Diminishing returns
Firm must decrease price to sell more
units
Minimizing Cost
•
•
•
•
The last worker increased TPP 20 units
The last unit of capital increased TPP 30 units
The labor wage is $40/day
The capital interest is $75/day
• The firm should increase labor and decrease capital
• Labor = .5 units per dollar
• Capital = .4 units per dollar
Payment for a resource above the
necessary payment for its employment
is called
• Economic rent
In perfectly competitive labor markets,
minimum wages cause
• A surplus of labor
Wage = $10
Clips P = $1
MRP of worker #4 = $5
Workers
0
1
2
3
4
5
Paperclips
0
20
42
60
65
66