Ec100
Week 8
Question 1
If eight workers can manufacture 22 shirts per day
and nine workers can manufacture 27 per day, and
if shirts can be sold for £5 each, the marginal
product of the ninth worker is:
• The marginal product of labour (or capital) = the
extra output produced by one more worker (or
unit of capital)
• Here, extra output is 5 shirts
• £25 is the marginal value product of labour
• (extra revenue from selling the output of the
marginal worker)
Question 2
The value of marginal product of capital is the
increase in:
• Notice the word “value”
• So it is the extra revenue (value to the firm) of
employing one more unit of capital
• The correct answer is: revenue that results
from employing one more unit of capital
Question 3
If the wages of pilots rises, would you expect the
demand for pilots to?
• The correct answer is: Go down a little
• Pilots & planes = (perfect) complements
Question 4
**Will do questions 9 & 10 first.
Suppose clothes are made by people alone but
can be made by workers in the UK or workers in
Bangladesh. What are the factors of production
in this case?
• Workers in the UK and Workers in Bangladesh
Question 5
If clothes can be produced by workers in the UK
and workers in Bangladesh, what do you think
the isoquants for producing clothes look like?
• Factor of production: here we have two types
of labour – workers in Bangladesh and workers
in UK.
• Clearly: UK and BD labour are easily
substituted… so straight line isoquants.
Question 6
• If clothes can be produced by workers in the
UK and workers in Bangladesh, what will
happen if wages in the UK rise by a lot?
LBD
LUK
Question 6
• If clothes can be produced by workers in the
UK and workers in Bangladesh, what will
happen if wages in the UK rise by a lot?
LBD
LUK
Question 6
• So: b. Employment in the UK will fall a lot and
employment in Bangladesh will rise a lot.
LBD
LUK
Question 7
If the wage of a worker is £5 per hour, how many
workers will a profit maximizing employer
demand?
• Hire an extra worker if it increases profits:
Change in revenue>change in cost
• By definition, this is the same as:
MVPL>wage
• With diminishing MPL, optimal amount of
labour is where:
MPVL=wage which is the same as
MPL=real wage
Question 8
Concerning the market for making widgets, assume that the wage
rate is €10 per hour in the Germany and €5 per hour in Poland.
If the marginal product of a Polish worker is 5 widgets per hour,
a German worker will be less costly to employ than a Polish
worker if the marginal product of the German worker is at least:
• Output per $ in Poland = 1
• Could a firm get the same return from investing in Germany?
• Only if MPL>=10
Question 9
Suppose output is produced from labour and capital alone. What
would be the effect of a rise in the interest rate on the demand
for labour if output is fixed?
• See diagram.
• It would increase.
• This is the same as the substitution effect in consumer choice.
Question 10
Suppose output is produced from labour and capital alone. What
would be the effect of a rise in the interest rate on the demand
for labour if output is variable and chosen by the firm to maximize
profits?
• Remember:
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–
–
–
–
–
Firm’s optimal output is where P=MC
(As long as P>=AC)
(& MC is upward sloping)
P=MC means firm reduces output when MC increases
See diagram
This reduces amount of labour and capital
Question 10
• But:
• Increase in cost of capital has made labour relatively cheaper
(substitution effect)
– See question 9
• Overall effect on demand for labour ambiguous
• (We know that demand for capital will fall)
• See lecture slides “when the wage rises”
Discussion Question
There is a country whose people live only on cheese
sandwiches made of two slices of cheese placed
between two slices of bread. Local taboos mean that
no-one has any interest in eating anything that is not
a complete sandwich formed in this way.
So cheese and bread are perfect complements…
Isoquants
• Plotting Isoquants
Bread Slices
2 slices
Isoquant for 1 sandwich
2 slices
Cheese
slices
Discussion Question
3. How many cheese sandwiches per person will be
produced a day if all workers are employed?
See board.
Discussion Question
4. Now suppose that a technological innovation causes a
cheese-maker to be able to produce 20 slices of cheese
a day. Explain why the number of cheese sandwiches
produced in the economy will be the same as before.
Amount of bread is the same. And cheese & bread
are perfect complements
Discussion Question
5. What will happen to the employment of cheese
makers?
• Only need half as many cheese makers to produce the
required amount of cheese.
• So expect a fall in employment of cheese makers.
• But not told about relative price of machine and
labour
Discussion Question
6. What will happen to wages?
•
•
•
•
Nothing happens to bread maker wages.
Cheese makers lose some bargaining power
Expect their wages to go down
Important assumption: workers cannot change
occupation…
Discussion Question
7. Now suppose that individuals can freely move
between occupations so that everyone can choose to
be a cheese maker or a bread maker.
8. What will be the effect of the innovation on the
number of cheese makers & bread makers?
People now want to be bread makers as they have a higher wage.
The number of cheese makers falls and number of bread makers increases.
This increases the bargaining power of cheese makers, and reduces
bargaining power of bread makers…
Discussion Question
10. What will happen to the wages of cheese makers &
bread makers?
Eventually…
Wage of cheese maker = wage of bread maker
This is the equilibrium outcome. If people can move freely, they go
wherever the wage is highest. But as more people go there, the wage falls
and rises in other sectors. Eventually, the wages are equal.
Discussion Question
9. What will be the effect on the total number of cheese
sandwiches?
Will increase.
Intuition: We have a technology that enables mass production of cheese.
So we want to have mass production of bread too (as they are perfect
complements). When labour was immobile, the potential mass production
of cheese was basically wasted because only a limited amount of bread
could be made. There was unemployment in the cheese sector – these
people could have been making bread!