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ECON 2005 Lecture Notes - Lecture 28: Marginal Revenue Productivity Theory Of Wages, Ceteris Paribus, Marginal Revenue

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tanox42
30 Apr 2018
School
Virginia Tech
Department
Economics
Course
ECON 2005
Professor
S C Trost

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Lecture #28 Notes
The Market Demand for Resources
• Resource demand comes from firms
o Derived demand – dead for iputs is deried fro the dead for the outputs that
require those inputs.
o Inputs are demanded by a firm if and only if households demand the good or service
produced by that firm.
• As with outputs, the demand for a resource is downward sloping: lower price for the input
means higher quantity demanded.
• As prie falls, produers uy ore of a resoure eause it’s heaper tha other sustitutable
inputs (substitution effect) and because they can afford more given budgets (income effect).
Input Markets: Basic Concepts (Focus on Labor)
• Average Product – the amount of output produced per unit of that input
• Marginal Product of Labor (MPL) – the additional output produced by one additional unit of
labor
• Recall: Diminishing Returns – as you add more of one input, holding others constant, the
marginal product will fall
• Marginal Revenue Product (MRP) – the additional revenue a firm earns by employing one
additional unit of input, ceteris paribus.
o MRPL = MPL x Px
o MRPK = MPK x Px
• Marginal Resource Cost (MRC) – the change in total cost when one additional unit of resource is
hired, ceteris paribus.
The Demand for an Input
• The Rule – A profit-maximizing firm will add inputs – in the case of labor, it will hire workers – as
long as the marginal revenue product of that input exceeds the market price of that input – in
the case of labor, the wage.
• So, the profit-maximizing amount of labor to hire is the amount at which:
o MRPL = Wage (MRCL)
Labor Markets
• Whe a fir uses oly oe ariale of produtio, that fator’s argial reeue produt ure
the doard slopig portio is the fir’s dead ure for that fator i the short ru.
The Demand for Inputs
• A firm employing two variable factors of production in the short and long run
o In firms employing just one variable of production, a change in price of that factors
affects only the demand for the factor itself.
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Document Summary

The market demand for resources: resource demand comes from firms, derived demand de(cid:373)a(cid:374)d for i(cid:374)puts is (cid:862)deri(cid:448)ed(cid:863) fro(cid:373) the de(cid:373)a(cid:374)d for the outputs that require those inputs. Labor markets: whe(cid:374) a fir(cid:373) uses o(cid:374)ly o(cid:374)e (cid:448)aria(cid:271)le of produ(cid:272)tio(cid:374), that fa(cid:272)tor"s (cid:373)argi(cid:374)al re(cid:448)e(cid:374)ue produ(cid:272)t (cid:272)ur(cid:448)e (cid:894)the do(cid:449)(cid:374)(cid:449)ard slopi(cid:374)g portio(cid:374)(cid:895) is the fir(cid:373)"s de(cid:373)a(cid:374)d (cid:272)ur(cid:448)e for that fa(cid:272)tor i(cid:374) the short ru(cid:374). The demand for inputs: a firm employing two variable factors of production in the short and long run. Input demand curves: three things can cause shifts in factor (input) demand curves, the demand for outputs. If product demand increases, product price will rise and marginal revenue product (factor demand) will increase the mrp curve will shift to the right. Or, capital can replace labor and decrease demand (substitutes: combination of the last two: sometimes the technology used, and the quantity of inputs used depends on the price of the inputs.

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Related Questions

If labor productivity increases,

Question 8 options:

 

the demand for labor increases.
 

labor costs rise by equal increments.
 

jobs will relocate.
 

some workers will be laid off.

In labor markets, the substitution effect occurs when

Question 10 options:

 

a change in the price of a substitute input reduces the cost of capital.
 

a change in the price of a substitute input causes the demand for labor to change in the same direction.
 

a substitute good also functions as a compliment.
 

the cost of production falls enough that the firm will produce a larger amount of output.

The demand for labor is

Question 6 options:

 

derived from the satisfaction that hiring the inputs provides the owner or manager of the firm more money.
 

totally unrelated to the demand curve for the final product.
 

derived from the demand for the final product being produced.
 

derived from a utility-maximizing process similar to that used to derive the demand curve for goods and services.
 

Question 1

 

A firm should hire workers up to the point where
 

Question 1 options:

 
MP = P.
 
MFC = P.
 
MFC = MRP.
 
MP = MRP.
 

Question 2

 

If the additional revenue from hiring an additional worker equals the additional costs from hiring the extra worker, then we know that
 
Question 2 options:
 
MFC/MPPL = wage.
 
MFC/MRPL = 1.
 
MFC = MPPL.
 
MRPL/P = MFC.
 

Question 3

A firm that maximizes profits also
 
Question 3 options:
 
pays input prices lower than other firms do.
 
cuts corners in production processes so that its products are made too cheaply.
 
is inefficient.
 
uses the least-cost combination of resources.

Question 4

The demand curve for labor slopes down because
 
Question 4 options:
 
firms value less efficient workers less than they value more efficient workers.
 
firms must lower prices to sell the additional units of its product that the extra workers produce.
 
of profit maximizing behavior.
 
of the law of diminishing marginal product.

Question 5

If MFC > MRPL, the firm should
 
Question 5 options:
 
get rid of some capital.
 
reduce the number of workers.
 
lower wages.
 
hire more workers.

Question 6

Which of the following will not lead to an increase in the demand for labor for a firm producing automobiles?
 
Question 6 options:
 
A decrease in labor productivity.
 
A decrease in the price of automobiles.
 
A decrease in the price of robots that are used to solder parts of the car together.
 
An increase in the demand for automobiles.

Question 7

 
The marginal revenue product gives
 
Question 7 options:
 
the additions to total cost when an additional unit of a variable input is hired.
 
the additional revenue obtained when an additional unit of a variable input is hired.
 
the change in total product for an additional unit of a variable input.
 
the amount that other inputs must increase by when labor increase by one unit.

Question 8

The monopolist's input demand curve is the
 
Question 8 options:
 
marginal physical product curve.
 
marginal revenue product curve.
 
marginal revenue curve.
 
marginal factor cost.

Question 9

An increase in product price implies that
 
Question 9 options:
 
the firm's demand for labor increases.
 
the firm's demand for labor decreases.
 
the wage rate the firm pays will increase.
 
the firm's marginal factor cost will increase.

Question 10

Which of the following will not lead to a change in the demand for labor?
 
Question 10 options:
 
A change in the supply of labor.
 
A change in demand for the final good.
 
A change in the price of a substitute input.
 
A change in labor productivity.

1. In a market economy, the high salaries of some star baseball players such as Adrian Gonzalez, are determined by

   

Team owners, based on the total number of star athletes they plan to hire.
  B

advertising companies, based on what they are willing to pay to advertise their products at baseball games.
  C

the interaction of the demand for star athletes and the supply of star athletes.
  D

consumers, based on their willingness to watch baseball games.

2. Demand in factor markets differs from demand in product markets in that

  A

the demand for a factor of production is difficult to determine.

B

  

the demand for a factor of production is influenced by workers' productivity and by the producers' expected sales revenues, not by tastes and preferences of consumers.

C

  

demand for a factor of production is based on the tastes and preferences of firms.

D

  

demand for a factor of production is based on the tastes and preferences of resource owners.
     

3. The demand for labor is described as a derived demand because

A

  

it is derived by workers seeking to earn income to fund the consumption of goods and services.

B

  

it is derived by producers seeking to make profits by starting new businesses.

C

  

it is derived from the demand for products that use labor in the production process.

D

  

it is derived from government institutions that rely on labor markets for the purpose of raising tax revenue.

4. Which of the following is not an example of a derived demand?

A

  

Several of the animated films released between 1999 and 2001 failed to earn a profit, which caused some companies to stop making these films, thereby decreasing the demand for animators.

B

  

Seth Bullock, a personal injury attorney, complains that he is earning far less now than a few years ago largely because personal injury cases have been undercut by state laws limiting class-action suits and payouts on damages.

C

  

Millicent Manning, the owner of a furniture store, is concerned that her sales have fallen for the past six months. She attributes this to the downturn in the real estate market.

D

  

As advancements in medical technology increase the safety and success of laser eye surgery, the demand for opticians has decreased.

5. Marginal revenue product for a perfectly competitive seller is equal to

A

  

the output price multiplied by the total product of labor.

B

  

the output price multiplied by the number of workers hired.

C

  

the change in total revenue that results from hiring another worker.

D

  

the marginal cost of production.

6. What is the difference between labor's marginal product and marginal revenue product?

A

  

The marginal product of labor is the increase in output as a result of hiring an additional worker while the marginal revenue product of labor is the increase in profit as a result of hiring an additional worker.

B

  

The marginal revenue product of labor is the dollar value of hiring an additional worker while the marginal product of labor is the increase in the firm's physical output as a result of hiring an additional worker.

C

  

The marginal product of labor is the additional labor's contribution to the firm's total output while the marginal revenue product is the additional labor's contribution to the firm's total sales revenue.

D

  

Labor's marginal product is a measure of labor's productivity while labor's marginal revenue product is a measure of labor's ability to sell the firm's products.

7. What is the difference between a firm's marginal revenue and its marginal revenue product?

A

  

Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the profit earned from hiring one more worker.

B

  

Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the change in total revenue from hiring one more worker.

C

  

Marginal revenue is the increase in revenue when a firm raises its output price while marginal revenue product is the increase in the marginal product when a firm hires an additional worker.

D

  

There is no difference between the two terms.