When to Hire
and When to
Fire?
Andrew Philipp
Firms will keep hiring workers until
the cost of hiring an additional
worker equals the additional
revenue made by that worker
Main Idea
Key Concepts
Marginal Product of Labor (MPL)- The change in
output resulting from employing an additional
until of labor
Marginal Revenue Product- MPL x Marginal
revenue received from selling an additional unit
of output
Marginal Factor Cost of Labor- The additional cost
of hiring an additional worker (wage)
MPL = MFC- The profit maximization point
How Many
Workers to Hire in
a Perfectly
Competitive
Market
Step 1
Number
of
Workers
Output Per Marginal
Hour
Product
0
0
0
1
2
2
2
6
4
3
12
6
4
17
5
5
21
4
6
24
3
7
23
-1
MP=Δoutput per hour
Δ# of Workers
Step 2
Number of Output
Marginal
Workers
Per Hour Product
Product Marginal
Price
Revenue
Product
0
0
0
$4
0
1
2
2
$4
8
2
6
4
$4
16
3
12
6
$4
24
4
17
5
$4
20
5
21
4
$4
16
6
24
3
$4
12
7
23
-1
x
$4
=
-4
MRP= P x MP
Step 3
Worker Wage = $18
Number
of
Workers
Output
Marginal
Per Hour Product
Product Marginal
Price
Revenue
Product
Marginal
Factor
Cost
0
0
0
$4
0
$18
1
2
2
$4
8
$18
2
6
4
$4
16
$18
3
12
6
$4
24
$18
4
17
5
$4
20
$18
5
21
4
$4
16
$18
6
24
3
$4
12
$18
7
23
-1
-4
$18
x
$4
=
MRP = MFC
In Derived
Demand
Derived Demand- The
demand for an input (labor)
that makes a consumer good
There is a Derived Demand in the
resource market for the labor that
produces the good or service
Product Market
Resource Market
If the demand
for the product
increases in the
product
market the
demand curve
shifts to the
right, causing
points P and Q
shift
Product Market
Because the
quantity
increases in the
product
market the
derived
demand in the
resource
market for
labor increases
Resource Market
(Labor)
2007 AP FRQ
 Questions-
http://www.collegeboard.com/prod_downloads
/ap/students/economics/ap07_frq_Microecono
mics.pdf
 Answer-
http://www.collegeboard.com/prod_downloads
/ap/students/economics/ap07_sg_micro.pdf
1) The profit maximizing rule for
determining the most profitable
number of workers to hire is:
A.Marginal revenue = marginal cost
rule
B.Marginal revenue product =
marginal resource cost rule
C.Marginal revenue = marginal profit
rule
D.Marginal resource cost = wage rule
2) The marginal product of an output
is the:
A.the item that has less quality than
the other items of output
B.the total ouput as an additional
worker is hired
C.the total selling revenue as an
additional worker is hired
D.the change in total output that is
produced when 1 additional
worker is hired.
3) The marginal resource cost is:
A.The change in selling price as one
more unit is sold.
B.The change in revenue as the output
from one more worker is sold.
C.The cost of hiring all the workers
used in the production of a product.
D.The cost of hiring one more unit of
input.
Real World Links
In Derived Demandhttp://www.nytimes.com/2011/09/10/business/economy/in-the-real-worldwill-the-jobs-plan-make-a-difference.html?pagewanted=all
http://www.forbes.com/sites/petercohan/2011/09/03/why-do-companieshire/