Page1

Production and Costs (cont.) The marginal product of labor (MPL), also called marginal product (MP), is defined as the increase in production that comes from an additional unit of labor, either hours or workers. For example, by working an additional five hours ( from five to ten), an extra crate is produced. Compare this to the increase from eighteen to thirty hours to produce an additional crate. At some point, the amount of workers or hours doesn't produce as

h Q t IANT ITY OF muc l' I ) l l' KIN

PHODl' CE D u (( ' HATE S)

5

4

2

/ 1 1 • --- - ---- -

/ 0 s 10

Hi g h er margi n al protlu ·t of la b or

1&20

l. o·w "r m argi na l prociu · t of l abor

30 Il ot US Of' WOHK

Page2

Production and Costs (cont.) The point at which the amount of workers or hours worked doesn't produce as much and is not worth adding is called diminishing returns to labor . In the pumpkin firm, there is a point where each additional labor input, either workers or hours, adds less and less additional output. If an additional labor input costs more than is beneficial, the worker won't be hired or a worker won't work so many hours. There is always an optimal number of workers at a business at a time. Anything more is a waste and loss to the firm.

Qu .-,1'."T ITY OF ... , ~ 1 ... KlN S

l'HOUt" C E:l> G (CHATI- .:..~)

5

4

2

l

0 I O

J Jigher marginal proc.lu ·t o, labor

20

L o ,ver margina l produe;t or l abor

:30 Il ot •n s OF '\VOUK

Page3

The Production Function Recall that the marginal product of labor is the change in production that can be obtained with an additional unit of labor. Decreasing marginal product of labor is called diminishing returns to labor. Increasing marginal product of labor is called increasing returns to labor.

increasing marginal product of labor c::::> decreasing marginal cost

decreasing marginal product of labor c::::> increasing marginal cost

Page4

The Production Function (cont.) The figure shows how, for low levels of labor input, the marginal product of labor increases. At low levels of production, increasing marginal product of labor is a possibility because the firm's capital can be better utilized: during an oil change, for example, the mechanic can work on another truck as oil drains from the first truck.

Q UA1''T ITY

12

10 ..

8 ..

---4 ... bul lh e n s t <.l rts 10 d e · lin t.' ... J

4 .... . ...

... and hlr ger. .. 6Q ~larg i na l produ c t of l abo r = -z

2

0 100 150 200 250

Il o ni s OF WO RK (L)

Page5

The Production Function (cont.) The table shows increasing marginal product of labor up to 3 units of output produced. Diminishing returns then begin .

Quantity (pianos moved)

0

_, ...,_ {.~ 4 5 6 -Q IL.fs~ - r f-i--., •

.I_ 2

10

Hours of Work

0 l 5 27 37 48 60 74

Labor Costs at $10 Wage

(variable costs)

1sg~,so 27§110 37 ,<10 48 1,e 600 740

•

s fl: C,"QC\.y& : }~ : __ ,:~;. ,:;, o~. I

2

. -. . . . : l-· - --t L....::..:...:= ~ ::.::....:::..:c=-:...;::.;...;::..;::.._---'-- _ _ __.

: }- - • l ... 1:>1. ,1 1.1 ...... ~~ .s t.a .rt. -"""" 10 d ec • i•-.. ~--- ) __ J-< . ~ ... =<l larg er ... I ... . ..... . ..

__ -,-{ . .. 1.hc:i,. gect.= larp;er ... f

G

0 .1.00 1 50 200 250

Page6

The Production Function (cont.) Be sure to distinguish between the marginal product of labor and the averag·e product of labor. The average product of labor is the quantity produced, or total product, divided by the total amount of labor input.

Page7

The Production Function-Questions

AP

MP

QUANTITY OF ABOR

7. The graph above show s the rnarginal produ ct (MP) and the average product (AP ) of labor for a finn that uses labor as the only variable input and hires its labor in a perfecUy competitiv e market. At which qu antity of labor does rnarginal cost change frotn decreasing to increa ing?

(A) L 1

(B) L 2

(C) L 3

(D) L 4

(E) L5

Page8

The Production Function-Questions

AP

MP

QUANTITY OF ABOR

7. The graph above show s the rnarginal produ ct (MP) and the average product (AP ) of labor for a finn that uses labor as the only variable input and hires its labor in a perfecUy competitiv e market. At which qu antity of labor does rnarginal cost change frotn decreasing to increa ing?

(A) L 1

• L2 (C) L 3

(D) L 4

(E) L5

Page9

Marginal Product and Marginal Revenue Product of J,abor The third column is the marginal product of labor (MPL) and the last column shows the marginal revenue product of labor (MRPL). This is the change in production and total revenue (TR), respectively, when one additional unit of labor is employed. For example, the marginal revenue product of labor, when moving from 2 to 3 workers, is $1,100. The difference between MP L and MRP L is that MP L focuses on the change in quantity (Q) produced while MRP L focuses on the change in revenue Table 13.1

• Labor Input and Marginal Revenue Product at a Competitiv ~ Fi.:.:,:rm:____.....,...,

Workers Employed Each Week

(L)

0 l 2 3 4 5 6 7 8 9

Marginal Quantity Product Produced of Labor

(Q) (MP)

O~-

~~~~ ~ 42 1 1 51 9 58 7

63 ======= 5 66 3

6 8 =====----=-2 69 I

Price of Output

(dollars) (P)

100 100 100 100 100 100 100 100 100 100

Total Marginal Revenue Revenue Product of Labor (dollars) (dollars)

(TR) (MRP)

0 =====--==----1 ,7 0 0 ---=---===---=-1 ,7 0 0 3,100 ~ 1,400 4,200 1, 100 . 5, l 00 900 5,800 700

6,300 ======= 500 6,600 _ 300 6 , 8 0 0 ---=---===---=-2 0 0 6,900 1 00

Page10

Marginal Product and Marginal Revenue Product of T,abor-Questions

Quantity of Marginal Marginal Revenue Labor Product Product

0 --- ---

1 20 $40

2 14 28

3 12 24

4 8 16

5 6 12

6 4 8

42. Ba ed on the table for a perfectly competitive firtn above, if the wage rate for labor i $15, ho\V tnany unit of labor should the firtn hire?

(A) 2 (B) 3 (C 4 (D) 5 {E) 6

Page11

Marginal Product and Marginal Revenue Product of T,abor-Questions

Quantity of Marginal Marginal Revenue Labor Product Product

0 --- ---

1 20 $40

2 14 28

3 12 24

4 8 16

5 6 12

6 4 8

42. Ba ed on the table for a perfectly competitive firtn above, if the wage rate for labor i $15, ho\V tnany unit of labor should the firtn hire?

(A) 2 (B) 3 (- 4 (D) 5 {E) 6

Page12

The Marginal Revenue Product of T ,abor Equals the Wage (MRPL = W) If the wage (W) for one full-time worker at the company below is $600 per week, the firm will hire a total of five workers to maximize profits because hiring a sixth worker would result in a marginal revenue product of labor (MRPL) of only $500, $100 less than its cost. This is a key rule of profit maximization: firms will hire workers up to the point where the marginal revenue product of labor (MRPL) equals the wage (W), thus MRPL == W.

Table 13 . 1 La bor Input a nd Marginal Revenue Pll"oduc t a t a Comp et i t iv e Fi rm

Wor ke r s M a rgin a l Pric e of Tot a l M argi n a l R e v e nu e Employ e d Qu a ntity Product Output Re v e nue Product o f La bor Ea ch W ee k P r oduc e d of La bor (doll a r s) (doll a r s) (doll ars )

( L ) (Q) (MP) (P) ( TR) (MRP)

0 O~ - 100 0 ======-==--1 100 1,700 ======-==-I ,700 2 ~i~: ~ 100 3,100 ~ 1,400 3 42 l 1 100 4,200 1 ,100 4 5 l 9 100 5 , 100 900 5 58 7 100 5,800 700 6 63 ======= 5 100 6,300 =======:: 500 7 100 66 3 6,600 300 8 6 8 ======-==-2 100 6,800 ===----=-=----2 0 0 9 69 1 100 6,900 100