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Wize AP Microeconomics Textbook > Labor Market

Profit Maximization in Labor Market

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Profit Maximization in Labor Market (VMP = Wage)

  • Factors of Production - these are also called inputs. It's anything you put in to the business like workers (labor), machines (capital), and raw materials.
  • Production Function - the relationship between inputs and output.
  • Marginal Product - The additional products from hiring one extra worker.


 Marginal Product= ∆Q∆L\boxed{\text\ Marginal\ Product =\ \frac{∆Q}{∆L}}

 Value of the Marginal Product (Marginal Revenue Product)= MP ⋅ Price\boxed{\text\ Value\ of\ the\ Marginal\ Product\ \left(Marginal\ Revenue\ Product\right) =\ MP\ \cdot\ Price}

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Example: Suppose the price that each textbook sells for in the market is $10 and the current wage per worker is $500

L (Labor) Q (Output) MP (Marginal Product) VMP (MRP) Wage Marginal Profit (VMP - Wage)
0 0 - - - -
1 100
100
$1000
$500
$500
2 180
80
$800
$500
$300
3 200
20
200
$500
$-300
4 210
10
$100
$500
$-400
5 215
5
$50
$500
$-450


  • If VMP (MRP) > Wage the firm should hire
    more
    labor. In the table above, this occurs for the first
    2
    workers.
  • If VMP (MRP) < Wage the firm should hire
    less
    labor. This occurs for worker
    3
    and any worker after that.
  • If VMP (MRP) = Wage the firm is maximizing profits (should not change labor)
  • The profit maximizing quantity of labor that should be hired is
    2
    workers







Practice: Profit Maximization in Labor Market

A backpack company in a competitive market sells its bags for $45 per bag and hires units of labor at a rate of $15 per hour. If they want to maximize their profits, they should hire units of labor until the marginal product of labor is