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Wize University 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
Extra Practice
The price of a firm's output is $10. Its wage is $30 and its marginal revenue product is $2. Which statement is true?
What's the most probable reason explaining the MRP curve moving from MRPA to MRPB?
At a level of output, the price of output is $20, the marginal product of labour is $240, and the wage is $12. The firm in this question
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
The demand curve for labour shifts when there is a change in
At a level of output, the price of output is $20, the marginal product of labour is $240, and the wage is $12. The firm in this question
When there is technological advancement,