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.
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 ________ ________ $500 ________
2 180 ________ ________ $500 ________
3 200 ________ ________ $500 ________
4 210 ________ ________ $500 ________
5 215 ________ ________ $500 ________
- If VMP (MRP) > Wage the firm should hire ________ labor. In the table above, this occurs for the first ________ workers.
- If VMP (MRP) < Wage the firm should hire ________ labor. This occurs for worker ________ 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 ________ workers