As units of variable input are added to a fixed input, total product will increase, first at an increasing rate and then at a declining rate. This will cause both marginal and average product curves to rise at first and then decline. Note that the marginal product curve intersects the average product curve at its maximum. The smooth curves indicate that the input can be increased by amounts of less than a single unit.
Firms demand labor, amongst other factors, to produce goods and services. The Marginal Revenue Product (MRP) of labor is the change in the total revenue of a firm that results from the employment of one additional unit of labor. The marginal revenue product of an input is equal to its marginal product multiplied by the marginal revenue of the good or service produced: MRP = MP x MR, where
Because of the law of diminishing returns, the marginal product of labor will fall as employment of the labor expands, and thus the marginal revenue product of labor will also fall as employment expands.
The firm has two equivalent conditions for maximizing profit. They are:
MRP = W => MP x MR = W => MR = W/MP, since W/MP = MC => MR = MC.
This relationship indicates why wage differences across skill categories will tend to reflect productivity differences. If skilled workers are twice as productive as unskilled workers, their wage rates will tend toward twice the wage rates of unskilled workers. Low wages do not necessarily mean low cost; it is not always cheaper to hire the lowest wage workers.
A mutual fund hiring research analysts is choosing among CFA charterholders and non-CFA charterholders. A CFA charterholder makes $200,000 per year and analyzes 400 stocks per year. A non-CFA charterholder makes $100,000 per year and can cover 100 stocks per year. Therefore, MCCFA = 200,000/400 = 500 and MCNON-CFA = 100,000/100 = 1,000.
As a result, the mutual fund will choose to hire CFA charterholders because they are twice as productive as non-CFA charterholders. This will cause the wages (price) of CFA charterholders to rise and the wages of non-CFA charterholders to fall until the ratios of the marginal product of each resource to its price (MP/P) are equal.
A. output effect
This is an example of the input substitution effect. Firms will replace inputs that become relatively more expensive with relatively cheaper inputs.
A. wages fall and employment decreases.
A. bowed inward
Since there is no comparative advantage, you need not give up ever-increasing quantities of one good to gain more of another good. The opportunity cost of gaining more of one good is constant and the production possibility curve is a straight line connecting the maximum points for each good.
The elasticity of demand for labor depends on the labor intensity of the production process, the elasticity of demand for the product, and the substitutability of capital for labor.