Chapter 5 Flashcards
What is one of the most important question asked when attempting to maximize profits?
Whether, and how, to increase or decrease output
What are some of the small (marginal) changes that must be made in order to search for profit improving possibilities?
Incrementally deciding the optimal level of output
What is the equation for the marginal product of labor?
MP(labor) = ΔQ/ΔL|(K constant)
What is the equation for marginal product of capital?
MP(capital) = ΔQ/ΔK|(L constant)
What is the equation for marginal revenue?
MR = P
What is the equation for marginal revenue product of labor?
MRP(labor) = MP(labor) . MR
What is the equation for marginal revenue product of capital?
MRP(capital) = MP(capital) . MR
or
MRP(capital) = MP(capital) . P
What does change in labor and change in capital do to the firm’s total cost?
It will add or subtract from the firm’s total costs
What is marginal expense of labor?
It is the change in total labor cost for each additional unit of labor hired
What happens to wage when the labor market is competitive?
Each worker hired is paid the same wage as all workers so ME(labor) = W
What kind of supply curve is the marginal expense of labor?
It is a horizontal supply curve
What happens to rental cost when the capital market is competitive?
Each additional unit of capital will have the same rental cost (C) so ME(capital) = C
What can’t the firm do when in the short-run?
In the short-run, the firm cannot vary its stock of capital
What is the equation for the production function?
Q = f(L,K)
What is assumed when both product and labor markets are competitive?
All producers or sellers are price takers in the product market
All employers of labor are wage takers in the labor market
Where does the analysis of a firm’s production and employment take place?
In the short run where the firm cannot vary its capital stock
What happens to output in the short run, where K (capital) is constant, and extra units of L (labor) are added?
It increases output in each case and MPL is positive to some point
What will eventually occur in the short run when adding more L (labor)? What is this called?
It will produce progressively smaller increments of output
This is called the law of diminishing marginal returns
What does the law of diminishing marginal returns describe?
It describes that, as employment expands, each additional worker has a progressively smaller share of the capital stock to work with
When is profit maximized?
It is maximized only when employment is such that any further one-unit change in labor would have a marginal revenue product equal to marginal expense
What are the two ways in which labor demand can be analyzed?
It can be analyzed in terms of either real or money wages
What does the negative slope of the labor demand curve indicate?
It indicates that each additional unit of labor employed produces a progressively smaller increment in output
What should the firm employe at any real wage determined by the market>
They should employ labor up to the point at which MP(labor) equals the real wage (W/P)
Why doesn’t MRP(labor) decline?
It does not decline because added workers are incompetent, it declines because capital stock is fixed hence added workers have less capital or equipment to work with
What does the labor demand curve do in the short run?
It slopes downward because it is the MRP(labor) curve, which slopes downward because of labor’s diminishing marginal product
Since MRP(labor) = W for a profit maximizer who takes wages as given, the MRP(labor) curve and labor demand curve (MP(labor)) must be __
the same
The marginal product of an individual is not a function solely of his or her personal characteristics
It depends on the number of similar employees hired by the firm and the firm’s capital stock
What is a market demand curve?
It is the summation of the labor demanded by all firms in a particular labor market at each level of the real wage
When real wage falls or increases the number of workers that existing firms want to employ ___
falls or increases
What is labor demand in the long run?
It is the firm’s ability to adjust other inputs such as capital will affect the demand for labor
How can a firm maximize its profits in the long run?
The firm must adjust L and K such that each input’s MRP is equal to ME
What must firms do to maximize profits?
The firm must adjust its labor and capital inputs so that the marginal cost of producing an added unit of output using labor is equal to the marginal cost of producing an added unit of output using capital
What are the categories that labor can be subdivided into?
Age, education level, and occupation
If two inputs are substitutes in production, and if an increase in the price of one input shifts the demand for another input to the left what effect dominates?
The scale effect dominates the substitution effect
If the increase in the price of one input shifts the demand for the other input to the right which effect dominates?
The substitution effect dominates
When two inputs must be used together in some proportion what are they considered to be?
They are considered to be perfect complements or complements in production – that is, no substitution effect, only scale effect.
What are monopoly producers?
They are price-makers in the product market but wage-takers in the labor market
Where will payroll taxes shift the labor demand curve?
It will shift it to the left
When will employers decrease their employment of workers?
When their wage costs increase by the tax amount due tot the payroll tax
When will employers retain the same amount of workers as before the payroll tax was imposed?
If the entire tax burden is passed onto the workers, that is, workers’ wages fall by the tax amount
Who bears the burden of the payroll tax?
Employees in the form of lower wage rates and lower employment levels when the government chooses to generate revenues through a payroll tax on employers
What does it mean when the labor supply curve is vertical? What would occur?
Lower or higher wages have no effect on labor supply
The entire amount of tax will be shifted to workers in the form of a decrease in their wages by the amount of payroll taxes
What are the different forms of government subsidies of employers’ payroll?
Cash payments
Tax credit to employers
How do government subsidies affect the labor demand curve?
They shift the curve to the right, thus creating pressures to increase employment levels and the wages received by employees
